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Title: Essays in economics of information and optimal contracting
Author: Terovitis, Spyridon
ISNI:       0000 0004 6423 8018
Awarding Body: University of Warwick
Current Institution: University of Warwick
Date of Award: 2017
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In the first chapter, I explore the problem of optimal contracting under delegation of information acquisition. I study a model where equity-holders of a fund delegate their portfolio allocation to a fund manager in an environment where: i) the expected return of the implemented portfolio depends on the ex-ante unknown future price of an asset, ii) the manager can acquire costly information about the future price, and iii) information acquisition is unobservable and unverifiable. I characterize the optimal contract which incentivizes the manager to obtain information and take the profit-maximizing position based on the available information. I show that the optimal contract implies a premium for positions against the publicly available information: a long position when an asset is considered overvalued, and vice versa. This premium leads the manager to adopt contrarian positions more often than the first best. I argue that this ‘bias against the flow’ is supported by empirical evidence. In the second chapter, I explore the impact of Credit Rating Agencies (CRAs) on capital markets. I argue that the source for potential inefficiencies arising from CRAs might be more pathological than the literature recognizes; even in the absence of conflicts of interest or other distortions resulting from players’ behavior, a CRA might have an adverse effect on critical economics variables. I develop a model of investment financing which, similarly to capital markets, is characterized by information asymmetry and lack of commitment. In the benchmark setting, the CRA is capable of perfect monitoring and reveals its private information truthfully and without cost. I explore the impact of such an “ideal” CRA on the interest rate and the probabilities of project financing and default. I find that introducing such a CRA may lead to under-financing of projects with a positive net present value (NPV) that would otherwise be financed; a higher expected interest rate; and a higher expected probability of default. These findings relate to the feedback effect, which is inherent in capital markets, and its asymmetric impact on firms of different quality. I evaluate the policy of restricting CRAs to provide hard evidence with their ratings, and suggest that it might have an unfavorable effect on the probabilities of project financing and default. In the third chapter, I explore the problem of security design with endogenous implementation choice. I study an economy where an entrepreneur raises capital to finance an investment project. My focus is on an environment where the entrepreneur shares the same characteristics as the representative entrepreneur in crowdfunding platforms: i) there is no record regarding her ability, ii) she might be associated with a negative-NPV project, and iii) she has limited liability. Asymmetric information regarding the entrepreneur’s ability between the entrepreneur and potential investors gives rise to a signaling game when the former issues securities to raise capital. I characterize the optimal security, and show that it is always optimal to reward the non-implementation of the project after financing takes place. I show that compared to a case where the entrepreneur is obliged to implement the project after raising capital, endogenizing the project implementation choice: i) prevents market breakdown, ii) leads to a more efficient allocation of resources, and iii) strengthens the incentive of an entrepreneur to invest in her productivity.
Supervisor: Not available Sponsor: State Scholarships Foundation (IKY) ; Alexander S. Onassis Public Benefit Foundation ; Royal Economic Society ; University of Warwick
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: HB Economic Theory