Research Seminar
Speaker: Theofanis Tsoulouhas (University of California)
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On Thursday, December 12 at 4.40pm International College of Economics and Finance held a research seminar.Speaker: Theofanis Tsoulouhas (University of California)
Theme: «Do Tournaments Solve the Adverse Selection Problem?»
Venue: Shabolovka st., 26, room 3211
Abstract: This paper provides a solution to a puzzle in the analysis of tournaments, that of why there is no agent discrimination in practice. The paper examines the problem of a principal contracting with multiple agents whose activities are subject to common shocks, when there is moral hazard and adverse selection. The presence of common shocks invites the use of relative performance evaluation to minimize the costs of moral hazard. But, in the additional presence of adverse selection, the analysis shows that at the optimum there may be no need for ex ante screening through menus of contract o¤ers (i.e., for agent discrimination). This isso because the principal becomes better informed ex post about agent types, via the realization of commonuncertainty, and can e¤ectively penalize or reward the agents ex post. Thus, unlike the standard adverseselection problem without common uncertainty where the principal bene ts from ex ante screening, it isshown that ex post sorting through relative performance evaluation reduces the scope for ex ante screeningthrough menus, and eliminates it completely if agents are known to not be very heterogeneous. This is consistent with observed practice in industries where the primary compensation mechanism is a cardinaltournament which is uniform among agents.