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on Contract Theory and Applications |
|
Issue of 2008‒06‒13
thirteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Hector Chade; Edward Schlee |
| Date: | 2008–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:122247000000002175&r=cta |
| By: | Nikolaos Georgantzís (LEE-LINEEX, Universitat Jaume I); Constantine Manasakis (Department of Economics, University of Crete, Greece); Evangelos Mitrokostas (Department of Economics, University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece) |
| Abstract: | Often, deviations of firm behavior from profit maximization are the result of managerial incentive contracts. We study the endogenous emergence of incentive contracts used by firm owners to delegate the strategic decisions of the firm. These contracts are linear combinations either of own firm's profits and revenues, or own and rival firms' profits. A two- and three-stage game are studied depending on whether owners commit or not to a certain contract type before setting the managerial incentives and the level of output to produce in the market. We report experimental results which confirm some of the predictions of the model, especially those concerning owners' preference for relative performance incentives over profit-revenue contracts. Neglected behavioral aspects are proposed as possible explanation of some divergence between the theory and the experimental evidence, more specifically the relation between contract terms and managers' output choices |
| Keywords: | Experimental economics; Oligopoly theory; Managerial delegation; Endogenous contracts. |
| JEL: | D43 L21 |
| Date: | 2008–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:crt:wpaper:0809&r=cta |
| By: | Oliver Gürtler; Matthias Kräkel (Department of Economics, BWL II, University of Bonn, Adenauerallee 24-42, 53113 Bonn, Germany; Department of Economics, BWL II, University of Bonn, Adenauerallee 24-42, 53113 Bonn, Germany) |
| Abstract: | We analyze the optimal design of rank-order tournaments with heterogeneous workers. If tournament prizes do not differ between the workers(uniform prizes), as in the previous tournament literature, the outcome will be ineffcient. In the case of limited liability, the employer may benefit from implementing more than first-best effort. We show that the employer can use individual prizes that satisfy a self-commitment condition and induce effcient incentives at the same time, thus solving a fundamental dilemma in tournament theory. Individual prizes exhibit two major advantages - they allow the extraction of worker rents and the adjustment of individual incentives, which will be important for the employer if he cannot rely on handicaps. |
| Keywords: | heterogenous workers. limited liability, rank-order tournaments, self commitment |
| JEL: | J33 M12 M52 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:234&r=cta |
| By: | Ramon Marimon; Vincenzo Quadrini |
| Abstract: | We develop a dynamic general equilibrium model with two-sided limited commitment to study how barriers to competition, such as restrictions to business start-up, affect the incentive to accumulate human capital. We show that a lack of contract enforceability amplifies the effect of barriers to competition on human capital accumulation. High barriers reduce the incentive to accumulate human capital by lowering the outside value of ‘skilled workers’, while low barriers can result in over-accumulation of human capital. This over-accumulation can be socially optimal if there are positive knowledge spillovers. A calibration exercise shows that this mechanism can account for significant cross-country income inequality. |
| Keywords: | Limited commitment, limited enforcement, human capital accumulation, income inequality, innovation, barriers to competition. |
| JEL: | D99 E20 J24 O15 O34 O43 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2008/21&r=cta |
| By: | Chopard, Bertrand; Cortade, Thomas; Langlais, Eric |
| Abstract: | Parties engaged in a litigation generally enter the discovery process with different informations regarding their case and/or an unequal endowment in terms of skill and ability to produce evidence and predict the outcome of a trial. Hence, they have to bear different legal costs to assess the (equilibrium) plaintiff's win rate. The paper analyses pretrial negotiations and revisits the selection hypothesis in the case where these legal expenditures are private information. This assumption is consistent with empirical evidence (Osborne, 1999). Two alternative situations are investigated, depending on whether there exists a unilateral or a bilateral informational asymmetry.\ Our general result is that efficient pretrial negotiations select cases with the smallest legal expenditures as those going to trial, while cases with largest costs prefer to settle. Under the one-sided asymmetric information assumption, we find that the American rule yields more trials and higher aggregate legal expenditures than the French and British rules. The two-sided case leads to a higher rate of trials, but in contrast provides less clear-cut predictions regarding the influence of fee-shifting. |
| Keywords: | litigation; unilateral and bilateral asymmetric information; legal expenditures |
| JEL: | D0 K0 D82 K41 |
| Date: | 2008–06–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8995&r=cta |
| By: | Pierre-Guillaume Méon (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and DULBEA, Université Libre de Bruxelles, Brussels.); Ariane Szafarz (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and DULBEA, Université Libre de Bruxelles, Brussels.) |
| Abstract: | This paper studies labour market discriminations as an agency problem. It sets up a principal-agent model of a firm, where the manager is a taste discriminator and has to make unobservable hiring decisions that determine the shareholder’s profits because workers differ in skills. The paper shows that performance-based contracts may moderate the manager’s propensity to discriminate, but that it is unlikely to fully eliminate discrimination. |
| Keywords: | discrimination, agency theory, hiring. |
| JEL: | J71 D21 M12 M51 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:08-019&r=cta |
| By: | Armstrong, Mark; Vickers, John |
| Abstract: | We present a model in which a principal delegates the choice of project to an agent with different preferences. The principal determines the set of projects from which the agent may choose. The principal can verify the characteristics of the project chosen by the agent, but does not know which other projects are available to the agent. Two frameworks are considered: (i) a static setting in which the collection of available projects is exogenous to the agent but uncertain, and (ii) a dynamic setting in which the agent searches for projects. |
| Keywords: | Delegation; principal-agent; rules; search; merger policy |
| JEL: | D86 D83 L4 |
| Date: | 2008–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8963&r=cta |
| By: | Ricardo Gonçalves (Faculdade de Economia e Gestão - Universidade Católica Portuguesa (Porto)) |
| Abstract: | This paper analyses a model of a common value English auction with discrete bidding. In this model, we show that there exists a communication equilibrium in which the high signal bidder strategically chooses his first bid so as to maximise his expected utility. Straightforward bidding, or increasing the bid by the minimum amount possible, is the equilibrium strategy for both bidders in all other auction rounds. We relate this result to recent research on English auctions with discrete bidding and auctions where bidders may have noisy information about their opponent's signals. |
| Keywords: | English Auctions, discrete bidding, communication equilibrium |
| JEL: | D44 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cap:wpaper:042008&r=cta |
| By: | Efraim Benmelech; Nittai K. Bergman |
| Abstract: | How do liquidation values affect financial contract renegotiation? While the 'incomplete contracting' theory of financial contracting predicts that liquidation values determine the allocation of bargaining power between creditors and debtors, there is little empirical evidence on financial contract renegotiations and the role asset values play in such bargaining. This paper attempts to fill this gap. We develop an incomplete-contracting model of financial contract renegotiation and estimate it using data on the airline industry in the United States. We find that airlines successfully renegotiate their lease obligations downwards when their financial position is sufficiently poor and when the liquidation value of their fleet is low. Our results show that strategic renegotiation is common in the airline industry. Moreover, the results emphasize the importance of the incomplete contracting perspective to real world financial contract renegotiation. |
| JEL: | G33 G34 K12 L93 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14059&r=cta |
| By: | Alexia Gaudeul (Centre for Competition Policy, University of East Anglia) |
| Abstract: | This paper examines one of the most important marketing strategies by software producers on the Internet. That is whether to offer free samples and if so, whether to list the samples on shareware repositories. I show that firms with higher value products have a greater incentive to offer free samples but are more reluctant to do so if they are well known, and even when they do are less likely to be listed on shareware repositories. I then proceed to use four types of Probit-based models to corroborate the findings from the theoretical model. |
| Keywords: | Shareware; Software; Internet; Distribution; Intermediation; Directory; Repository; Advertising; Brand; Reputation; Asymmetric Information; Search; Sample. |
| JEL: | D42 D43 D82 D83 L13 L15 L81 L86 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:ccp:wpaper:wp08-23&r=cta |
| By: | Marinucci, Marco |
| Abstract: | This paper faces two questions concerning Joint Ventures (JV) agreements. First, we study how the partners contribution affect the creation and the profit sharing of a JV when partners' effort is not observable. Then, we see whether such agreements are easier to enforce when the decision on JV profit sharing among partners is either delegated to the independent JV management (Management Sharing) or jointly taken by partners (Coordinated Sharing). We find that the firm whose effort has a higher impact on the JV's profits should have a larger profit shares. Moreover, a Management sharing ensures, at least in some cases, a wider range of self-enforceable JV agreements. |
| Keywords: | joint ventures; strategic alliances; ownership structure; asymmetries. |
| JEL: | L14 L13 D43 L22 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8985&r=cta |
| By: | Katja Rost; Emil Inauen; Margit Osterloh; Bruno S. Frey |
| Abstract: | The corporate governance structure of monasteries is analyzed to derive new insights into solving agency problems of modern corporations. In the long history of monasteries, some abbots and monks lined their own pockets and monasteries were undisciplined. Monasteries developed special systems to check these excesses and therefore were able to survive for centuries. These features are studied from an economic perspective. Benedictine monasteries in Baden-Württemberg, Bavaria and German speaking Switzerland have an average lifetime of almost 500 years and only a quarter of them broke up as a result of agency problems. We argue that this is due to an appropriate governance structure, relying strongly on the intrinsic motivation of the members and on internal control mechanisms. |
| Keywords: | Corporate Governance, Principal-Agency-Theory, Psychological Economics, Monasteries, Benedictine Order |
| JEL: | D73 G3 L14 Z12 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:374&r=cta |
| By: | Brown, Martin (Swiss National Bank); Falk, Armin (University of Bonn); Fehr, Ernst (University of Zurich) |
| Abstract: | When unemployment prevails, relations with a particular firm are valuable for workers. As a consequence, a worker may adhere to an implicit agreement to provide high effort, even when performance is no third-party enforceable. But can implicit agreements - or relational contracts - also motivate high worker performance when the labor market is tight? We examine this question by implementing an experimental market in which there is an excess demand for labor and the performance of workers is not third-party enforceable. We show that relational contracts emerge in which firms reward performing workers with wages that exceed the going market rate. This motivates workers to provide high effort, even though they could shirk and switch firms. Our results thus suggest that unemployment is not a necessary device to motivate workers. We also discuss how market conditions affect relational contracting by comparing identical labor markets with excess supply and excess demand for labor. Long-term relationships turn out to be less frequent when there is excess demand for labor compared to a market characterized by unemployment. Surprisingly though, this does not compromise market performance. |
| Keywords: | Relational Contracts; Involuntary Unemployment |
| JEL: | C90 D82 E24 J30 J41 |
| Date: | 2008–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:snbwpa:2008_007&r=cta |