Essays on applied information economics theory Public Deposited

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Last Modified
  • March 22, 2019
Creator
  • Fragoso Gonzalez, David
    • Affiliation: College of Arts and Sciences, Department of Economics
Abstract
  • This dissertation contains two essays on applied microeconomic theory, each addressing situations of asymmetric information between economic agents. The first essay develops a theoretical model to illustrate how a short-termist board with positive inside information can use disclosed executive compensation to credibly signal its optimism to the less informed outsiders pricing the company's stock. The board uses the fact that performance based pay is more valuable to the executive when prospects are good to give her a compensation package that she would not accept if the inside information were bad. Signaling does not always distort compensation packages away from optimal incentive provision; when it does, the distortion is magnified if the moral hazard in the agency relation between board and executive is large, the executive's contribution to company performance is relatively unimportant, the company's operations are relatively risky, and the enforcement of disclosure rules is weak. By outlining some conditions in which compensation is likely to be used as a signal and characterizing the distortions that such use induces in different circumstances, this paper proposes new explanations for the observed heterogeneity in compensation practices. The second essay develops a new theory of the organization of the financial audit market to explain the observed variation in market concentration across market segments. It provides a micro-founded model of audit demand whereby audit clients enjoy network benefits from having other clients audited by their auditor. Using two versions of the model, and under the assumption of diseconomies of scale in the audit sector, the essay derives two alternative explanations for audit market outcomes. The first is that, because they value the network benefits from auditing more highly, client companies in which informational asymmetries are more severe retain auditors with more clients. The second is that, because they generate a larger network effect, companies in which accounting errors are more likely to become public are also audited by larger auditors. The hypotheses behind these explanations are that the visibility of a company and the severity of information asymmetries are correlated with size and ownership type.
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  • In Copyright
Advisor
  • Biglaiser, Gary
Degree
  • Doctor of Philosophy
Graduation year
  • 2013
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