Asymmetric Information Costs Research Articles

Strikes in British Coal Mining, 1893–1940: Testing Models of Strikes

Unlike earlier studies, which focus on one model, I use data on British coal mining strikes to test several models of strikes, for example, the war‐of‐attrition, one‐sided asymmetric information and joint costs models as well as the safety valve hypothesis, which is related to “forest fire” models of strikes. I determine whether the data and estimates are compatible with these models as well as how observers in retrospective and contemporary accounts viewed these strikes. I find that the empirical and narrative evidence is supportive of the safety valve hypothesis, but is often at odds with the other (more commonly used) models.

Managerial optimism, investment cash flow sensitivity and agency costs: Evidence from NYSE panel data firms

This study deals with a new survey for the relationship between CEO optimism and investment cash flow (ICF) sensitivity in presence of asymmetric information and agency costs problems. In this paper, we conduct an empirical study of ICF among NYSE manufacture firms during the period 1999–2010. Our results report that the ICF sensitivity exists and is significant especially for firms that run agency costs. This result is robust to a battery of different model including alternative assumptions and different methodologies based on Adjusted Q-model and Euler equation model. For another set of tests, we demonstrate that a large blockholders holding may succeed to reduce investment cash flow caused by CEOs optimism bias.

Optimal subsidy and recycling mode of waste cooking oil under asymmetric information

With the increasingly serious energy crisis and environmental problems, the production of bio-fuel from waste cooking oil (WCO) has attracted government’s attention around the world. Appropriate government subsidies and recycling modes can effectively promote the recycling of WCO. The government can provide subsidies to the bio-firm or the recycler, and the bio-firm can complete the recycling activity herself or entrust an independent recycler. This paper applies a principal-agent contract in a reverse supply chain which includes the government, bio-firm and recycler to probe into the optimal subsidy and recycling mode strategy under asymmetric recycling cost information of the recycler. Analysing and comparing the different subsidy and recycling mode strategies, we find that case BT, which refers that the government should subsidize bio-firm rather than recycler and the bio-firm should entrust recycler to collect WCO, is preferred by both the government and the bio-firm due to the higher recycling quantity and profits. Furthermore, the three players are all inclined to case BT when the recycling cost is relatively small. Last, the total collected quantity will decrease when the information turns to be asymmetric, which makes the supply chain less-efficient.

Coordinating supply chains with uncertain production cost by incomplete contracts

ABSTRACT Production cost affects heavily supply chain coordination, but it is uncertain in many cases. We consider a supply chain consisting of a manufacturer and a retailer, where the unit production cost is uncertain when the firms sign a procurement contract. We derive the optimal decisions and profits for the centralised and decentralised cases. We show that production cost uncertainty exaggerates the supply chain’s incentive conflict, but may increase the expected profit in the centralised decision case. Then we design an incomplete contract, which sets a wholesale price and an order quantity in the first stage, which the firms can re-negotiate after the production cost is realised in the second stage. We prove that such an incomplete contract can lead to the first best outcome. We further consider the case with asymmetric cost information and show that the incomplete contract can also coordinate the supply chain. Furthermore, we discuss how the degree of contract incompleteness, re-negotiation freedom, and residual control rights affect the supply chain performance. The results reveal that the hold-up problem is prone to occur with improper contract incompleteness, re-negotiation freedom, and residual control rights, while the incomplete contract we propose can effectively avoid the problem.

The Janus view: Do market participants looking into the past impact foreign exchange volatility?

AbstractDo market participants look into the past whilst framing the trading decisions today? Microstructure theory shows that participants increase bid‐ask spreads in response to macroeconomic news to account for asymmetric information and inventory costs. However, the role of perceptions or biases of the market participants in influencing the bid‐ask spread has been largely overlooked. This paper incorporates the role of ‘Recurrence bias’ in influencing trading decisions and therefore market volatility. Empirically, the model is tested using high‐frequency exchange rate data and time‐stamped news data on Indian rupee, which has seen sharp volatility in the period under study. Logit and GARCH analysis shows that volatility is positively linked to ‘Recurrence Bias’, which arises from the ‘availability of mental models’ to traders, created by past response of exchange rate to unexpected component of news.

Store brand introduction and quantity decision under asymmetric cost information in a retailer-led supply chain

The paper focuses on the topic of introducing store brands under asymmetric cost information in a retailer-dominant supply chain. We assume that the manufacturer privately knows the production cost for national brands, while the retailer only knows the distribution of the cost information. There exists a signal game between the manufacturer and the retailer after introducing store brands. In such case, when the true production cost for national brands is high, the manufacturer has to distort downward the production quantity to make the retailer believe the production cost is indeed high. Such distortion may amplify double marginalization. As a result, the retailer becomes worse off while the manufacturer becomes better/worse off from introducing store brands. In addition, the manufacturer does not share information to the retailer without introducing store brands, while the manufacturer may prefer to sharing information to the retailer with introducing store brands.

Asymmetric information, business environment, and transactions costs among business owners in Nigeria: Implications for female entrepreneurial sustainability transitions

AbstractThis article assesses the link between asymmetric information and transaction cost and how this can enhance or hinder female business owners from attaining entrepreneurial sustainability transitions in the Nigerian business space. The concept of information dissemination, business environment, and ease of doing business were scrutinized as a subdivision of asymmetric information and transaction cost theory among female entrepreneurs in Nigeria using the Enterprise Survey Data of the World Bank. Key indicators like regulations and taxes, gender, firm characteristics, finance, and infrastructure were highlighted as major business obstacles limiting female entrepreneurs. These were found to limit female entrepreneurs in accessing information, which can help them adequately flourish in the Nigerian business environment, as well as the attainment of entrepreneurial sustainability transitions.

Effects of the Transfer of Rights and Jurisdictions on Mining Reclamation Performance in State Forest Areas in East Kalimantan

Mining is still considered to be an essential sector to gain national income and to provide energy supply. Forest Leasehold License (FLL) is a mechanism to accommodate the non-forestry sector, including mining development in the forest area. This license is a form of transfer of right given from Minister of Environment and Forestry to a mining license holder. Transfer of right by FLL contractual shaped jurisdictional boundary that is one of the obligations that has to be complied by FLL holder is to conduct mining reclamation. This study aimed to analyze the effects of FLL and its jurisdictional boundary on mining reclamation performance in East Kalimantan forest areas. It is a descriptive qualitative study based implemented the agency theory with the institutional approach. The study found that mining permit and FLL is a temporary transfer of right. The emerging problem in the FLL and its jurisdictional boundary related to asymmetric information and transaction cost caused moral hazards such as adverse risk selection of FLL holders by the principal, reclamation ignorance by the agent, and opportunism both from principal and agent. These agency problems affect FLL reclamation performance that just reached 41.35% over disturbed areas. Institutional challenges are due to the regulation gap creating a conflict of interest, budget and human resource constrain, cost center activity, and lack of economic incentive as well as lack of coordination among the government institutions. The research findings suggested inputs for institutional arrangement in terms of transfer of the right, including FLL reclamation process business, to improve its performance in the East Kalimantan forest area.

Regulating a public transit monopoly under asymmetric cost information

The regulation of a monopolistic public transit operator whose marginal cost is unknown to the regulator is studied in this paper. We contribute to the transit regulation literature by presenting an incentive-compatible (IC) regulatory policy with consideration of the decision interactions between the regulator and transit operator under asymmetric information. The regulator only has some subjective prior probability distribution for the unknown marginal cost before designing regulatory policies (i.e., probability of permitting operations, maximum fare, maximum headway, and subsidy amount) to maximize the expected social welfare over the unknown cost. The operator with privately held cost information optimizes its fare and headway decisions subject to regulatory policies. The proposed IC policy is derived analytically, which gives the operator no incentive to misrepresent its cost. We compare regulations under symmetric information versusasymmetric information, and measure the deadweight loss due to the information asymmetry. The proposed IC policy is also compared with a benchmark policy, which is based on the cost expected by the regulator, to demonstrate its superiority. We find: (1) solutions under asymmetric information can be reproduced by solving the regulation problem under symmetric information with an enlarged marginal cost; (2) a regulator adopting the benchmark policy may set fare and headway limits above the levels selected by a profit-maximizing monopolistic operator. This study improves the state of the artin public transit regulation by presenting an effective tool for designing IC regulatory policies.

Flying under the Radar: Confidential Filings and IPO Lawsuits

IPO firms face strong concerns about proprietary disclosure, prompting regulators to allow submission of IPO registration statements confidentially under the JOBS Act. Prior research documents severe underpricing and other asymmetric information costs associated with obscuring information prior to an IPO. Nonetheless, the vast majority of eligible firms elect the confidential filing provision. In this study, we examine reducing non-shareholder litigation risk as a specific and quantifiable benefit that justify the use of this provision. We show that firms that publicly submit their registration with the SEC experience a 25% increase in non-shareholder lawsuits during the pre-IPO period. In contrast, a matched sample of firms that utilize the confidential filing provision do not experience such an increase. The difference between the two groups is concentrated among lawsuits in which the plaintiff is a business, rather than an individual, and among lawsuits that are more likely to be meritless. We find no disproportionate increase in non-shareholder lawsuits for the confidential filers following the IPO, which suggests that withholding information before the IPO period mitigates, rather than delays, opportunistic litigation.

Optimal Incentive Contract with Asymmetric Cost Information

AbstractAs a prevalent problem for construction projects, contractor cost details are unobserved or unknown to the owner. This paper considers a risk-averse owner (he) who engages a risk-neutral co...

Assessment of Asymmetric Information Cost in Indian Stock Market: A Sectoral Approach

Bid-ask spread, along with profit, also encompass the impact of asymmetric information cost and order processing cost. Asymmetric information influences stock prices with varying degree of investors’ perception. Estimation of asymmetric information cost and its determinants have been explored significantly under low-frequency trading. The literature hardly attempts to study asymmetric information cost under high-frequency trading (HFT). Asymmetric information cost significantly influences bid-ask spread, and hence the nature of its impact under different market conditions needs to be analyzed under HFT. The study attempts to estimate asymmetric information cost in HFT and analyze its determinants under different industry sectors and market conditions. The study followed Affleck-Graves et al. (1994 , The Journal of Finance, 49(4), 1471–1488) model to estimate the asymmetric information cost using 5 minutes interval data for a period of 82 trading days. Information gets reflected in equity through the movement in price, variation in trading volume, and return volatility. The study has found share price, traded volume, return volatility and trading frequency as the major determinants of asymmetric information cost in different market conditions. The findings of the study have significant implications for market microstructure for trading, lowering information asymmetry in market and enhancing market quality.

Inside the Regulatory Sandbox: Effects on Fintech Funding

Over 50 countries have introduced regulatory sandboxes to foster financial innovation. This paper conducts the first evaluation of their ability to improve fintechs' access to capital. Exploiting the staggered introduction of the UK sandbox, we compare firms in earlier to those in later cohorts. Firms entering the sandbox see an increase of 15% in capital raised post-entry; their probability of raising capital increases by 50%. We present evidence that the sandbox facilitates access to capital by reducing asymmetric information and regulatory costs. Controlling for time-varying confounding factors at the firm- or investor-level through fixed effects does not affect our findings.

Delegation vs. direct sourcing revisited: contract types under correlated supply risks and asymmetric cost information

As a popular practice in purchasing, an ever-increasing number of upper-tier suppliers are being added in the supply base of the original equipment manufacturer (OEM) and leveraged to reduce supply risk. This new trend increases the OEM's opportunities to directly source from tier-2 suppliers (direct sourcing for better control) in addition to delegating tier-1 suppliers to source on behalf of the OEM itself (delegation). This paper is devoted to comparing these two mechanisms (delegation vs. direct souring) under both asymmetric information on the production costs of tier-2 suppliers and correlated supply disruptions with tier-2 suppliers. When the OEM offers a revenue-sharing term contract or a base-commitment term contract (in which the OEM is required to procure a fixed base quantity in addition to an option of procuring additional units at a pre-specified price) to a tier-1 supplier under delegation, delegation achieves the same profit for the OEM as direct sourcing does. However, under a fixed-quantity term contract, delegation achieves a lower profit for the OEM than direct sourcing does, no matter the CM is subject to the procurement budget constraint or deep pocket. Moreover, we find delegation may lead to a higher profit for the OEM than direct sourcing does if an improved fixed-quantity term contract is used under delegation with a deep-pocket CM.

Corporate non-financial disclosure, firm value, risk, and agency costs: evidence from Italian listed companies

This study examines the relationship between corporate non-financial disclosure ratings, the Italian Legislative Decrees 231/2001 and 254/2016, and three outcomes of Italian listed firms: performance, risk and agency cost. Based on stakeholder–agency theory, this study conceptualizes the role of firms’ non-financial disclosures in reducing asymmetric information and agency costs between managers and broad stakeholders. Utilizing the Standard Ethics Rating (SER) as a measure of firms’ non-financial disclosure rating, this study finds that SER ratings are positively related to firm value and are negatively related to firms’ risk and agency costs. This study also provides evidence that the adoption of Italian Legislative Decrees 231/2001 and 254/2016, along with external verifications from the SER of firms’ non-financial disclosure, has a positive impact on firm outcomes. Corporate managers and investors should recognize the value added from regulations that foster non-financial disclosures and ratings issued by an independent rating agency (e.g., Standard Ethics) as they both enhance firm performance and reduce risk and agency costs.

A Review of the Main Issues on the Loan Contracts: Asymmetric Information, Poor Transparency, and Hidden Costs

The well-known subprime mortgage crisis, which began to manifest in early 2007, since when the effects of the speculative bubble begin to become evident from the increase in default rates in residential mortgages, has triggered a global crisis that has pushed various legislations over time to implement a series of financial reforms with the specific objective of avoiding that similar phenomena could be repeated over time. The ability to repay a loan is strongly influenced by the amortization algorithm that the bank has decided to adopt. This appears even more evident in variable interest rate loans since, as the economic conditions of the indexation parameter change, the definition of the loan balance and the related portion of interest will be decisive in relation to the borrower’s ability to repay the loaned capital. A study of the main amortization algorithms and the related descriptions in the bank contracts will allow us to show which are the main issues due to an information asymmetry that, unfortunately, characterizes this type of contract and would seem to be one of the main reasons that lie at the root of the aforementioned crisis of subprime mortgages in the USA. Moreover, the authors will provide a clear analysis of the financial indicators usually reported in loan contracts and how often these indications are insufficient to characterize the actual cost of the loan. Furthermore, by highlighting the discretionary choice that banks often obtain following the contractual loan schemes commonly offered to retail and corporate clients, we will show how this often translates into greater cost to the borrower. Finally, we will propose two possible solutions to the problems highlighted, thus allowing us to reduce this information gap, which unfortunately translates into greater costs for customers with the associated increase in default rates, or the so-called nonperforming loan (NPLs) contracts. Therefore, the objective of this contribution is to show which are the most critical aspects of the bank contracts related to contractual transparency and to the presence or otherwise of hidden costs, i.e., not expressly shown in the contract. Specifically, we refer to the loan contracts issued in Italy both with reference to the local banking legislation and to the European one to which Italy must often refer.

Google Search Volume and Stock Market Liquidity

Our research showed that search volume on Google serves or GSV as an intuitive proxy for overall stock market recognition. We proposed a predictive parsimonious model TFARM (two factor auto-regressive methodology) on stock market liquidity measures (bid - ask spread, market efficiency coefficient, trading probability, turnover ratio (TR), and total volume (TV)) and employed public and free information such as GSV (Google search volume) on a dataset from NSE (National Stock Exchange) for period between 2004-2016 divided into pre, during, and post subprime crisis of 2007-2008. We found that an increase in Google search queries was linked to a rise in stock liquidity and trading activity. We characterized the improved liquidity to a decrease in asymmetric information costs and thus, concluded that GSV mainly measured attention from uninformed investors. Moreover, we found evidence that an increase in search volume was associated with temporarily higher future returns, which reinforced the previous findings. Impact of GSV on both TV and TR in terms of direction was similar in nature and consistent with the findings of Preis, Moat, and Stanley (2013).

Quantity-payment versus two-part tariff contracts in an assembly system with asymmetric cost information

This paper investigates an assembly system that consists of one assembler and two suppliers wherein one supplier possesses private cost information. We explore how in such a setting, the contract type (quantity-payment versus two-part tariff) and contracting sequence (simultaneous versus sequential) between the assembler and its suppliers influence the channel and individual firms’ performances. Our results for the basic model show the following: (1) Coordinating the purchase quantities from both suppliers does not always increase the channel’s and the assembler’s profits. (2) The assembler obtains the highest profit under a quantity-payment contract with sequential contracting. (3) The supplier with private information and the channel both prefer a two-part tariff contract over a quantity-payment contract. We also extend our basic model to a case where the assembler contracts with one supplier under a two-part tariff contract and with the other under a quantity-payment contract. We identify the firms’ equilibrium decisions and preferences over different contract types and contracting sequences.

Kontrak Usaha Pemanfaatan Wisata Alam pada Kesatuan Pengelolaan Hutan Lindung Rinjani Barat

Partnership in natural tourism utilization of protected forests area can increase the forests value, but also has a risk of damage to forest areas managed by KPHL Rinjani West (FMU). The relationship between FMU and partners can be seen as a principal-agent relationship that may have problems as adverse selection, asymmetric information, moral hazard and agency costs. The results of policy analysis, field observation, and in-depth interviews with related parties indicate that some policies provide different partnership schemes with its own advantages. Benefit by each party needs to be followed by appropriate role in partnership. Increased revenues and changes in the beneficiary system can raise potential revenue for KPH and partners.

Option contract design for supply chains under asymmetric cost information

Purpose A lack of visibility into the manufacturer’s production cost information impedes a retailer’s ability to maximize her own profits, especially when market demand is uncertain. The purpose of this paper is to investigate the use of an option contract within a one-period two-echelon supply chain in the presence of asymmetric cost information. Design/methodology/approach Based on the principal-agent model, the retailer, acting as a Stackelberg leader, offers a menu of option contracts to mitigate the risk of uncertain demand and reveal asymmetric production cost information. The optimal contract in asymmetric and symmetric information scenarios is derived. Finally, the impact of production costs on the optimal contracts and the actors’ profits is explored by numerical experiments. Findings By comparing the optimal equilibrium solutions in two scenarios, the authors show that asymmetric cost information has a large impact on the optimal option contract and profits. In addition, information rent is affected by the type differential. The results prove that the level of information asymmetry plays a vital role in option contracts and profits. Originality/value Different from the existing literature on private demand information, this paper considers a supply chain with asymmetric cost information in the context of option contracts. Interestingly, not only the production cost but also the probability of a low production cost can affect the option strike price. In addition, from the perspective of the manufacturer, a high cost does not always bring a high information rent. These findings can provide some guidance to decision-makers.