Asymmetric information in managerial incentive contracts and in futures markets

The general focus of this thesis is to analyze how asymmetric information affects a decentralized economy in which the allocations of resources by the Walrasian model are not possible.;As the size of the manager's wealth investment in their firm rises, the shirking will decrease but the incongruity between the manager and shareholders' risk preferences will increase. Therefore, the second best solution requires that an adequate level of wealth (of the manger) should be invested in the firm, so that an optimal effort level and optimal risk level (of projects) is agreed on.;The second paper discusses an economic model of futures markets in the presence of informational externalities. Our derivations indicate that when the speculators' information set contains noisy signals (asymmetries or imperfections), it might influence the other traders (i.e. producers), and confuse the producers' information set. Consequently, the producers' decision making of production might be shrunk, resulting in a lower supply in the next period's spot market. As a result the futures spot price rises and speculators have a profit opportunity.;Therefore, since futures markets with noisy signals offer profit opportunities to speculators, less risk-averse or risk-neutral speculators are willing to join futures markets for profit opportunities. An increase in the number of speculators makes the futures price increase. Accordingly producers are encouraged to raise their output, leading to greater consumers surplus. This kind of effect can reduce or compensate for the economic loss which comes from poor information. Thus, the effect of the presence of futures markets is positive for the economy regardless of informational efficiency. With or without noisy signals, futures markets play an important role in stabilizing futures spot prices by guiding the rational production decision.;The first paper analyzes managerial incentive contracts in which the manager's moral hazard is caused by hidden action in effort and decision making (for example, selecting risky projects). Since the manager is assumed to have significant initial wealth, it is very important for shareholders to design a compensation scheme that considers the presence of this initial wealth of the manager. Because shareholders cannot observe hidden actions in effort and decision making, they should consider the incongruity in risk preferences between managers and themselves. Therefore, in the presence of the manager's wealth, the wealth level invested in the firm can be used to estimate the manager's shirking of effort and the risk preferences regarding the choice of risky projects, which directly affect shareholder profits.