Essays on moral hazard, reputation and market structure
Toth, Aron (2008) Essays on moral hazard, reputation and market structure. PhD thesis, University of Warwick.
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Official URL: http://webcat.warwick.ac.uk/record=b2248456~S9
This thesis is comprised of three pieces of research on moral hazard, reputation and market structure.
In particular, following an opening discussion of previous literature, I explore the dynamic interaction
between moral hazard and market structure in two distinct game theoretic settings and empirically test
a fundamental assumption of these models concerning consumer rationality.
In the first Chapter, I survey the studies which shed light on some dimension of the relationship
between asymmetric information and market structure and identify the gap in the literature that my
research aims to fill. The mechanism of reputation has been primarily investigated in the setting of perfect
competition; however, this setting is ill suited for uncovering the rich set of relations between asymmetric
information and market structure. Only a handful of articles departed from the perfect competition
framework and only few of those introduced strategic interaction among firms, a fundamental ingredient
of my research interest. The models which do include strategic interaction have, however, ignored some
important dynamics in the interaction of asymmetric information and market structure.
Therefore in Chapter II, I develop a model in which market structure affects moral hazard while,
in turn, moral hazard fuels market structure dynamics. The model is very general allowing for all
kinds of strategic interaction among firms usually considered in the literature. I identify and analyse an
important driving force -a survival contest - which has so far been overlooked. The main conclusion
is that market concentration in and of itself reduces moral hazard and moral hazard drives the market
towards concentration through the survival contest. The model is suitable to explain the puzzling market
transformation of important industries such as banking, audit and health care.
In Chapter III, I extend the model of Chapter 11 by introducing stochastic entry. First, I demonstrate
that my results in the previous Chapter are robust to the entry process. Second, stochastic entry allows me
to derive a non-degenerate steady state distribution which exhibits a very intuitive dynamics. Finally,
although the complex nature of the dynamics prevents a detailed comparative static analysis of this
distribution, it displays two well known empirical regularities. In particular, my model shows that the
presence of moral hazard in and of itself produces shake-outs in the market from time to time and also
correlated exit and entry rates. The reputation mechanisms in general and in the models of Chapter II and III in particular crucially depend on consumers' ability and willingness to develop an understanding of imperfect information on quality. In order to make reputation an effective disciplinary force, consumers must be strongly rational so that they read and understand imperfect quality indicators. In Chapter IV, this basic assumption on consumer rationality is tested empirically in discrete choice settings in the audit market. I find robust empirical evidence that if consumers are firms rather than individuals, they are strongly rational.
|Item Type:||Thesis or Dissertation (PhD)|
|Subjects:||H Social Sciences > HB Economic Theory
Q Science > QA Mathematics
|Library of Congress Subject Headings (LCSH):||Moral hazard -- Research, Game theory -- Research, Consumer behavior -- Research, Information asymmetry, Decision making -- Econometric models|
|Official Date:||September 2008|
|Institution:||University of Warwick|
|Theses Department:||Department of Economics|
|Supervisor(s)/Advisor:||Slade, Margaret E., 1940- ; Mezzetti, Claudio|
|Sponsors:||University of Warwick. Dept. of Economics (UoW)|
|Format of File:|
|Extent:||119 leaves : charts|
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