nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2008‒04‒21
twelve papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. Access Regulation under Asymmetric Information about Demand By João Vareda
  2. Information Revelation in an Online Auction with Common Values By Sascha Füllbrunn
  3. Learning by Doing vs. Learning from Others in a Principal-Agent Model By Jasmina Arifovic; Alexander Karaivanov
  4. "Strategic Default Jump as Impulse Control in Continuous Time" By Hisashi Nakamura
  5. Do UK Institutional Shareholders Monitor their Investee Firms? By Goergen, M.; Renneboog, L.D.R.; Zhang, C.
  6. Improving prevention compliance through appropriate incentives By Schneider, Udo; Zerth, Jürgen
  7. Feedback and Incentives: Experimental Evidence By Eriksson, Tor; Poulsen, Anders; Villeval, Marie-Claire
  8. Large Institutional Underpinnings of Trustworthiness in Infrastructure Contracts: Trust and Trust Perceptions By Xeni Dassiou; Jon Stern
  9. Cartel Organization and Antitrust Enforcement By Zhijun
  10. Institutions and Contract Enforcement By Falk, Armin; Huffman, David; MacLeod, W. Bentley
  11. Capture and Corruption in Public Utilities: the Cases of Water and Electricity in Sub-Saharan Africa By AURIOL, Emmanuelle; BLANC, Aymeric
  12. "Suicide and Life Insurance" By Joe Chen; Yun Jeong Choi; Yasuyuki Sawada

  1. By: João Vareda (Autoridade da Concorrência)
    Abstract: We study the impact of access regulation in a telecommunications market on an entrant?s decision whether to invest in a network or ask for access when the regulator cannot observe its potential demand. Since the entrant has incentives to not compete vigorously right after entry in order to convince the regulator that it needs cheap access in the future, the regulator must set access prices which tend to be distorted (lower or higher) as compared to fi?rst best. Still, this is better than committing to ignore ex post demand information. Consulting the entrant earlier about its expectations improves welfare and may help to achieve the ?first best.
    Keywords: Access Pricing, Asymmetric Information, Signaling, Revelation principle
    JEL: D82 D92 L51 L96
    Date: 2007–11
  2. By: Sascha Füllbrunn (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: The Hard Close auction has become a familiar auction format in online markets and in a private value framework this dynamic second-price auction format has experimentally been tested in recent studies. Considering a common value framework, Bajari and Hortaçsu (2003) demonstrate that in the Hard Close auction format bidders, using a sniping strategy, do not provide information during the auction. We provide contrary results from a laboratory experiment. Bidders provide information during the bidding process, resulting in different bid functions that depend on the bidders private information rank.
    Keywords: auctions, electronic markets, experiments
    JEL: C73 C9 D44
    Date: 2008–04
  3. By: Jasmina Arifovic (Simon Fraser University); Alexander Karaivanov (Simon Fraser University)
    Abstract: We introduce learning in a principal-agent model of stochastic output sharing under moral hazard. Without knowing the agents' preferences and technology the principal tries to learn the optimal agency contract. We implement two learning paradigms - social (learning from others) and individual (learning by doing). We use a social evolutionary learning algorithm (SEL) to represent social learning. Within the individual learning paradigm, we investigate the performance of reinforcement learning (RL), experience-weighted attraction learning (EWA), and individual evolutionary learning (IEL). Overall, our results show that learning in the principal-agent environment is very difficult. This is due to three main reasons: (1) the stochastic environment, (2) a discontinuity in the payoff space in a neighborhood of the optimal contract due to the participation constraint and (3) incorrect evaluation of foregone payoffs in the sequential game principal-agent setting. The first two factors apply to all learning algorithms we study while the third is the main contributor for the failure of the EWA and IEL models. Social learning (SEL), especially combined with selective replication, is much more successful in achieving convergence to the optimal contract than the canonical versions of individual learning from the literature. A modified version of the IEL algorithm using realized payoff evaluation performs better than the other individual learning models; however, it still falls short of the social learning's ability to converge to the optimal contract.
    Keywords: learning, principal-agent model, moral hazard
    JEL: D83 D86 C63
    Date: 2007–11
  4. By: Hisashi Nakamura (Faculty of Economics, University of Tokyo)
    Abstract: This paper presents a new approach for modeling an optimal debt contract in continuous time. It examines a competing contract design in a continuous-time environment with Markov income shocks and costly veriable information. It shows that an optimal contract has the form of a debt contract that permits a debtor's strategic default and reorganization. The default is formulated as an optimal impulse control. This paper provides a useful framework to investigate the debtor's default incentives in relationships to a monitoring technology. Numerical examples show that the equilibrium probability of the default is decreasing in a level of the monitoring technology.
    Date: 2007–12
  5. By: Goergen, M.; Renneboog, L.D.R.; Zhang, C. (Tilburg University, Center for Economic Research)
    Abstract: As institutional investors are the largest shareholders in most listed UK firms, one expects them to monitor the firms they invest in. However, there is mounting empirical evidence which suggests that they do not perform any monitoring. This paper provides a new test on whether UK institutional investors engage in monitoring. The test consists of an event study on directors? trades. If institutional shareholders act as monitors, their monitoring activities convey new information about a firm?s future value to other outside shareholders and reduce the informational asymmetry between the managers and the market. As a result, directors? trades convey less information to the market, and the stock price reaction is weaker. However, our results show that institutional shareholders do not have any significant impact on the stock price reaction which stands in marked contrast with the impact that families, individuals and other firms have on stock prices.
    Keywords: Insider trading;institutional investor monitoring;shareholder activism;corporate governance;ownership and control
    JEL: G14 G39
    Date: 2008
  6. By: Schneider, Udo; Zerth, Jürgen
    Abstract: This paper theoretically and empirically explores the effects of insurance parameters and a complementary information environment on patient´s primary prevention activity in the context of a managed care organisation. The theoretical model is based on a principal-agent setting in which the patient is acting as an agent in deciding about his preventive effort. Both for the patient and for the insurer the information distribution about prevention efforts is diluted. Hence, the theoretical results reflect the impact of insurance parameters as well as complementary information settings. The empirical investigation sheds the light on the patient´s prevention decision in the case of smoking. This depends on age effects, education, working time and health status. The research also stresses the relationship between monetary incentive schemes and individual behaviour as well as the influence of additional information schemes. In addition to the theoretical results, there is an evidence that changes in health behaviour depend on education and individual health assessment, too.
    Keywords: Incentives in Prevention; Information distribution
    JEL: I12 C23 D82
    Date: 2008
  7. By: Eriksson, Tor (Aarhus School of Business); Poulsen, Anders (University of East Anglia); Villeval, Marie-Claire (CNRS, GATE)
    Abstract: This paper experimentally investigates the impact of different pay and relative performance information policies on employee effort. We explore three information policies: No feedback about relative performance, feedback given halfway through the production period, and continuously updated feedback. The pay schemes are a piece rate payment scheme and a winner-takes-all tournament. We find that, regardless of the pay scheme used, feedback does not improve performance. There are no significant peer effects in the piece-rate pay scheme. In contrast, in the tournament scheme we find some evidence of positive peer effects since the underdogs almost never quit the competition even when lagging significantly behind, and frontrunners do not slack off. Moreover, in both pay schemes information feedback reduces the quality of the low performers’ work.
    Keywords: performance pay, tournament, piece rate, peer effects, information, feedback, evaluation, experiment
    JEL: C70 J16 J24 M52 J33 J31 C91
    Date: 2008–04
  8. By: Xeni Dassiou (Department of Economics, City University, London); Jon Stern (Department of Economics, City University, London)
    Abstract: This paper discusses trust and trust perceptions in infrastructure contracts. We focus on perceptions of the trustworthiness of the government purchasers of infrastructure services (a) by supplying companies and (b) by governments. In particular, we allow for trust misalignments which may give rise to `undertrusting' and `overtrusting'. The core of the paper sets out a game theoretic model of contracts which we use to explore the impact of trust misalignment both on economic efficiency and on investment levels, taking account both of asset specificity issues and maladaptation costs. We explore flexible contracts with and without pre-payments, rigid contracts (which do not allow for post-investment renegotiation) and hybrid contracts. Their efficiency is compared to an incentive compatible benchmark contract. The model is also used to shed light on current issues on the sustainability of private investment infrastructure contracts both in OECD countries (e.g. Private-Public Partnerships) and in developing countries.
    Date: 2008–04
  9. By: Zhijun (ESRC Centre for Competition Policy, University of East Anglia)
    Abstract: This paper incorporates the economic theory of organizations into the framework of public law enforcement, and characterizes the dual-coalition structure of cartel organization that allows us to highlight the strategic interactions between cartel participants under different antitrust policies. We show that delegation of authorities over collusive decisions from top executives to subordinates can mitigate the temptation of renege on collusive relationships and thus contributes to facilitating collusion. This result parallels the insights in Baker, Gibbons and Murphy (2002, 2006) which find that the optimal allocation of decision rights is to minimize the maximum temptation to renege on relational contracts. Moreover, the efficiency gains of delegation in facilitating collusion can be mitigated when the corporate leniency program is introduced, in particular whenever it is unlikely to detect cartels absent leniency and the corporate liability is muc more significant than individual liability.
    Keywords: cartel organization, antitrust enforcement, leniency programs
    JEL: D23 K21 L41
    Date: 2008–04
  10. By: Falk, Armin (University of Bonn); Huffman, David (Swarthmore College); MacLeod, W. Bentley (Columbia University)
    Abstract: We provide evidence on how two important types of institutions – dismissal barriers, and bonus pay – affect contract enforcement behavior in a market with incomplete contracts and repeated interactions. Dismissal barriers are shown to have a strong negative impact on worker performance, and market efficiency, by interfering with firms' use of firing threat as an incentive device. Dismissal barriers also distort the dynamics of worker effort levels over time, cause firms to rely more on the spot market for labor, and create a distribution of relationship lengths in the market that is more extreme, with more very short and more very long relationships. The introduction of a bonus pay option dramatically changes the market outcome. Firms are observed to substitute bonus pay for threat of firing as an incentive device, almost entirely offsetting the negative incentive and efficiency effects of dismissal barriers. Nevertheless, contract enforcement behavior remains fundamentally changed, because the option to pay bonuses causes firms to rely less on long-term relationships. Our results show that market outcomes are the result of a complex interplay between contract enforcement policies and the institutions in which they are embedded.
    Keywords: employment protection, efficiency wages, bonus pay, incomplete contracts, firing costs, experiment
    JEL: J41 J3 C9 D01
    Date: 2008–04
  11. By: AURIOL, Emmanuelle; BLANC, Aymeric
    Date: 2008–01
  12. By: Joe Chen (Faculty of Economics, University of Tokyo); Yun Jeong Choi (Faculty of Economics, University of Tokyo); Yasuyuki Sawada (Faculty of Economics, University of Tokyo)
    Abstract: In this paper, we investigate the nexus between life insurance and suicide behavior using OECD cross-country data from 1980 to 2002. Through semiparametric instrumental variable regressions with fixed effects, we find that for the majority of observations, there exists a positive relationship between suicide rate and life insurance density (premium per capita). Since life insurance policies pay death benefits even in suicide cases after the suicide exemption period, the presence of adverse selection and moral hazard suggests an incentive effect that leads to this positive relationship. The novelty of our analysis lies in the use of cross-country variations in the length of the suicide exemption period in life insurance policies as the identifying instrument for life insurance density. Our results provide compelling evidence suggesting the existence of adverse selection and moral hazards in life insurance markets in OECD countries.
    Date: 2008–04

This nep-cta issue is ©2008 by Simona Fabrizi. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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