Date of Award
Doctor of Philosophy
This thesis consists of three essays on information economics.;The first essay is "Dynamic Insurance between Two Risk Averse Agents with Bilateral Asymmetric Information." There are two infinitely lived agents in our model, both risk averse, and each has an i.i.d. random endowment stream which is unobservable to the other. Dynamic incentive compatibility in the Nash sense is studied. Feasible and incentive compatible coinsurance contracts are characterized. We give sufficient and necessary conditions for the existence of a constrained efficient contract. We show that a constrained efficient contract can be characterized in a Bellman equation. Algorithms for numerical solution to the Bellman equation are discussed and an example with exponential utility is computed. Our computational results show that, among other things, the wealth position of each agent follows a random walk with reflecting barriers.;The second essay, "Adverse Selection in Credit Markets with Costly Screening," is a joint work with Steve Williamson. In this essay, we develop a credit market model with adverse selection where risk-neutral borrowers self select because lenders make use of a costly screening technology. The model has some features which are similar to the Rothschild-Stiglitz adverse selection model. If an equilibrium exists it is a separating equilibrium, and there exist parameter values for which an equilibrium does not exist. Equilibrium contracts are debt contracts, and it is robust to randomization, in contrast to results for the costly state verification model. This framework can be extended to permit financial intermediary structures, and it potentially has many applications.;The third essay, "Incentives, CEO Compensation, and Shareholder Wealth in A Dynamic Agency Model," uses a simple dynamic agency model to address a CEO compensation issue raised by Jensen and Murphy (1990). Jensen and Murphy argue that the observed pay-performance sensitivity, though positive, is too low to be consistent with formal agency theory. Two observations are made from computational results. First, in levels, CEO compensation and shareholder wealth are nonpositively correlated. Second, the first differences in CEO compensation and shareholder wealth can be positively or negatively correlated, depending on the degree of risk-sharing achieved with the optimal contract. Furthermore, for a wide variety of plausible parameter values, our model is capable of generating data where the pay-performance sensitivity can be significantly positive but very small, as in Jensen and Murphy's data. We therefore conclude that Jensen and Murphy's empirical finding is consistent with dynamic agency theory.
Wang, Cheng, "Essays On Information Economics" (1994). Digitized Theses. 2413.