Final Payoff Research Articles

Two-Period Financial Contracts with Private Information and Costly State Verification

Townsend [1982] and others have argued that, in a multiperiod context, linked contracts may be Pareto efficient relative to the private information environment. The similarities with the supergame literature are well documented. Townsend [1982, p. 1169] remarks: . . the key idea of supergames is that future payoffs to the decision maker are tied to present actions of the decision maker. In this context, by linking contracts together, an informed agent may be induced to report more honestly than in a singleperiod agreement. In other words, honesty may become the best policy. In recent work Allen [1985] and Fudenberg et al. [1990] show that in a private information environment with no precommitment the gains to long-term contracting (income smoothing) in models such as Townsend [1982] are in fact due to restrictions on borrowing and saving. In particular, if the entrepreneur can access capital markets freely and on the same terms as the bank, then long-term contracts will be no better than a sequence of short-term contracts in the repeated model. The role of tie-ins then reflects little more than the fact that opportunities depend upon wealth as in the full-information decentralized solution. In this paper the entrepreneur only cares about his final payoff so that we do not establish a role for long-term contracts as a means of smoothing income. Instead, as suggested by Hart and Holmstrom [1986], we argue that long-term contracts derive from an inability to costlessly verify contingencies. In particular, if output realizations of projects are not costlessly verifiable, a long-term contract may then be used to induce truthful revelations that cannot be supported by a sequence of short-term contracts. This leads to a saving of verification costs over allocations achieved with unlinked contracts. This argument contributes to understanding why firms with known future prospects do not finance projects separately but instead enter into long-term relationships with banks. We examine a two-period version of the borrower-lender problem of Gale and Hellwig [1985] and Townsend [1979]. In this

Tax Clienteles and Optimal Capital Structure Under Uncertainty

This article demonstrates that investors' heterogeneous tax status implies that they value bonds differently at the margin. Due to asymmetric personal taxes, high-risk bonds generate a higher amount of taxable income than low-risk bonds and are, therefore, held by investors in low tax brackets. In such a setting, firms can increase their value by choosing a capital structure that attracts a particular bondholder clientele. The author analyzes how bondholder clienteles change as the uncertainty about a bond's final payoff is resolved over time and shows how tax-clientele effects influence firms' capital structure decisions. Copyright 1990 by the University of Chicago.

The Bargaining Set of a Reinsurance Market

This paper uses the same notations and some of the results of Baton and Lemaire (1981). The reader is referred to that work for more details about the classical risk exchange model, which will not be recalled here. The main result of that former paper was to characterize the core of the market in the case of exponential utilities, and to show that it is never empty. Since the core always exists, and since it is such an intuitive notion, one might wonder why we introduce here a much more complicated concept. The reason is that the core is presently subject to a heavy fire of criticisms–both experimental and theoretical–from leading researchers in game theory; they claim that the core is much too static, that it does not take into account the real dynamics of the bargaining process, that it does not introduce the full spectrum of negotiation threats of the traders. Indeed, experimental data consistently produce final payoffs that lie outside the core, but within the bargaining set (abbreviated: b.s.). We shall attempt to illustrate those criticisms in 4. We shall define the b.s. in a general non transferable game in 2, and characterize it in the special case of a 3-company reinsurance market in 3, but first of all we would like to explain intuitively the basic mechanisms of the b.s. by means of a simple example (with transferable utilities).The basic difficulty in modelling a negotiation process is to express what is the purpose of the game. Certainly, the objective is not just to get the maximal amount of profits, because if everyone demands the highest payoff he can obtain in a coalition, no agreement will be reached; the goal of the process is to attain some state of stability, to which the bargainers should agree if they want any agreement to be enforced. This stability should reflect in some way the power of each player, which results from the rules of the game, his initial situation, his attitude towards risk, …A bargaining process is a multi-criteria situation, in which the players certainly attempt to maximize their payoffs, but also try to enter into a “safe” or “stable” coalition.

Dynamics of Borrower‐Lender Interaction: Partitioning Final Payoff in Venture Capital Finance

The Journal of FinanceVolume 34, Issue 2 p. 517-529 Session Topic: Multiperiod Financial Models Dynamics of Borrower-Lender Interaction: Partitioning Final Payoff in Venture Capital Finance IAN A. COOPER, IAN A. COOPERSearch for more papers by this authorWILLARD T. CARLETON, WILLARD T. CARLETONLondon Graduate School of Business Studies, and University of North Carolina, Chapel Hill, respectively. This work was partially supported by the National Science Foundation, Grant Number RDA 75–22652.Search for more papers by this author IAN A. COOPER, IAN A. COOPERSearch for more papers by this authorWILLARD T. CARLETON, WILLARD T. CARLETONLondon Graduate School of Business Studies, and University of North Carolina, Chapel Hill, respectively. This work was partially supported by the National Science Foundation, Grant Number RDA 75–22652.Search for more papers by this author First published: May 1979 https://doi.org/10.1111/j.1540-6261.1979.tb02117.xCitations: 13 Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Citing Literature Volume34, Issue2May 1979Pages 517-529 RelatedInformation

Dynamics of Borrower-lender Interaction: Partitioning Final Payoff in Venture Capital Finance

Dynamics of Borrower-lender Interaction: Partitioning Final Payoff in Venture Capital Finance

Dynamics of Borrower-lender Interaction: Partitioning Final Payoff in Venture Capital Finance: Discussion

Dynamics of Borrower-lender Interaction: Partitioning Final Payoff in Venture Capital Finance: Discussion

Estimating the planning horizon in a multistage decision task

To estimate the number of stages contained in the planning horizon, while performing a decision task, a modified multistage betting game is considered. The version introduces a maximum final pay-off. Under the assumption of a logarithmic utility-function the optimal policy is derived. According to the number of anticipated stages, different suboptimal policies may be distinguished. In two experiments, a total of 100 Ss were investigated under four experimental conditions. The medians for the estimates of the length of the planning horizon are around two stages. The efficiencies of the according suboptimal policies were determined in a sensitivity analysis and were found to be approximately 90 percent.

An Equilibrium-Point Interpretation of Stable Sets and a Proposed Alternative Definition

The paper argues that the von Neumann-Morgenstern definition of stable sets is unsatisfactory because it neglects the destabilizing effect of indirect dominance relations. This argument is supported both by heuristic considerations and by construction of a bargaining game B(G), formalizing the bargaining process by which the players agree on their payoffs from an n-person cooperative game G. (G itself is assumed to be given in characteristic-function form allowing side payments.) The strategies ρi, the players use in this bargaining game will determine which payoff vectors x will be stationary, i.e., will have the property that, should such a payoff vector x be proposed to the players, all further bargaining will stop and x will be accepted as the outcome of the game. It will be suggested that a stable set should be defined as the set V of all stationary payoff vectors x, on the assumption that the players' bargaining strategies p, will form a canonical equilibrium point ρ in the bargaining game B(G). In a certain class of games, to be called absolutely stable games, indirect dominance relations turn out to be irrelevant, and in these games the suggested definition for stable sets is equivalent to the von Neumann-Morgenstern definition. But in general this is not the case. However, if we assume that the players will adopt bargaining strategies deliberately discouraging any use of indirect dominance relations, then, in every game, the stable sets our model yields will always be von Neumann-Morgenstern stable sets. At the end of the paper, we briefly discuss a possible modification in the suggested definition for stable sets, based on a modified bargaining game B0(G), in which the players are permitted to accept cuts in their provisional payoffs if they think that this move will increase their final payoffs.

A Realistic Look at the Final Payoffs from Urban Data Systems

T HE GLAMOROUS capabilities of computerized information appear so dazzling that no major city planning proposal is considered respectable unless it contains at least one section on EDP, ADP, or an urban data bank. Nevertheless, automated data systems are still regarded with uncertainty and uneasiness by many key urban decision-makers. How can anyone even a trained data technicianjudge whether these systems are really worth the huge costs involved? Even more significant, how will these systems affect the relative power and influence of various individual decision-makers? Ultimately, the answers to these questions depend upon assessing the final payoffs from urban data systems. Final payoffs are actual improvements in government or private action, as distinguished from improvements in the information on which such action is based. Up to now, most of the concern with urban data systems has not been focused upon final payoffs for three reasons. First, the technical design of these systems has seemed more exciting, more novel-and more amenable to analysis. Second, most detailed analyses of the decision process have been performed by members of computer hardware firms. Naturally, they have concentrated upon describing the impressive improvements in information they c a n undoubtedly deliver. Third, it appears obvious that better data in urban decision-making would have huge final payoffs, because it has hardly been doubted that better information would reduce both the frequency and the magnitude of planning mistakes. ) Ultimately the answers to many of the questions about computerized information depend upon an assessment of the final payoffs of the system, that is, actual improvements in governmental or private actions as distinguished from improvements in the information upon which such action is based. The author analyzes the types of final payoffs and some of the implications for government and private decision-making in urban areas.