nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2008‒07‒14
five papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. Conformity in search markets By Ingmar Nyman; Matthew Baker
  2. Partnership contracts, project finance and information asymmetries: from competition for the contract to competition within the contract? By Frederic Marty; Arnaud Voisin
  3. Which Government Interventions Are Good in Alleviating Credit Market Failures? By Karel Janda
  4. Fines, Leniency, Rewards and Organized Crime: Evidence from Antitrust Experiments By Bigoni, Maria; Fridolfsson, Sven-Olof; Le Coq, Chloé; Spagnolo, Giancarlo
  5. Firms’ Ethics, Consumer Boycotts, and Signalling By Glazer, Amihai; Kanniainen, Vesa; Poutvaara, Panu

  1. By: Ingmar Nyman (Hunter College); Matthew Baker (Hunter College)
    Abstract: We study how private information is used in a search market with non-transferable utility. We show that competitive pressure can turn privately informed agents into "yes men" who, against their own better judgement, mimic behavior that prior information suggests is more valuable. This is more likely to happen when prior, public information is strong relative to private information. The result is not enough frictional unemployment and search, and too much employment in activities favored by prior information. Moreover, the "yes-man" incentive grows stronger when private information is more persistent: we are more likely to lie about what we are than about what we know.
    Keywords: Search; Non-Transferable Utility; Conformity; Yes Men
    JEL: D82 D83 J64
    Date: 2008
  2. By: Frederic Marty (Observatoire Français des Conjonctures Économiques); Arnaud Voisin (University of Nice)
    Date: 2008
  3. By: Karel Janda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; University of Economics, Prague; Transgas-RWE Chair in Economics)
    Abstract: Credit contracting between a lender with a market power and a small start-up entrepreneur may lead to a rejection of projects whose expected benefits are higher than their total costs when an adverse selection is present. This inefficiency may be eliminated by a government support in the form of credit guarantees or subsidies. The principal-agent model of this paper compares different forms of government support and concludes that a guarantee defined as a proportion of a gross interest rate is not a sufficiently robust policy instrument. Lump-sum guarantees and interest rate subsidies are evaluated as better instruments because they have a nonambiguous positive effect on a social efficiency since they enable funding of socially efficient projects which would not be financed otherwise.
    Keywords: information asymmetry, credit, guarantees, subsidies
    JEL: D82 G18 H25
    Date: 2008–07
  4. By: Bigoni, Maria (IMT-Lucca); Fridolfsson, Sven-Olof (Research Institute of Industrial Economics (IFN)); Le Coq, Chloé (Stockholm Institute of Transition Economies); Spagnolo, Giancarlo (Stockholm Institute of Transition Economics)
    Abstract: Leniency policies and rewards for whistleblowers are being introduced in ever more fields of law enforcement, though their deterrence effects are often hard to observe, and the likely effect of changes in the specific features of these schemes can only be observed experimentally. This paper reports results from an experiment designed to examine the effects of fines, leniency programs, and reward schemes for whistleblowers on firms' decision to form cartels (cartel deterrence) and on their price choices. Our subjects play a repeated Bertrand price game with differentiated goods and uncertain duration, and we run several treatments differing in the probability of cartels being caught, the level of fine, the possibility of self-reporting (and not paying a fine), the existence of a reward for reporting. We find that fines following successful investigations but without leniency have a deterrence effect (reduce the number of cartels formed) but also a pro-collusive effect (increase collusive prices in surviving cartels). Leniency programs might not be more efficient than standard antitrust enforcement, since in our experiment they do deter a significantly higher fraction of cartels from forming, but they also induce even higher prices in those cartels that are not reported, pushing average market price significantly up relative to treatments without antitrust enforcement. With rewards for whistle blowing, instead, cartels are systematically reported, which completely disrupts subjects' ability to form cartels and sustain high prices, and almost complete deterrence is achieved. If the ringleader is excluded from the leniency program the deterrence effect of leniency falls and prices are higher than otherwise. As for tacit collusion, under standard anti-trust enforcement or leniency programs subjects who do not communicate (do not go for explicit cartels) tend to choose weakly higher prices than where there is no anti-trust enforcement. We also analyze post-conviction behavior, finding that there is a strong expost deterrence (desistance) effect. Moreover post-conviction prices are on average lower than before even though the average prices within cartels are the same. Finally, we find a strong cultural effect comparing treatments in Stockholm with those in Rome, suggesting that optimal law enforcement institutions differ with culture.
    Keywords: Law Enforcement; Antitrust; Cartel Deterrence; Leniency; Experiment
    JEL: K21 K42 L13 L41
    Date: 2008–04–24
  5. By: Glazer, Amihai (University of California, Irvine); Kanniainen, Vesa (University of Helsinki); Poutvaara, Panu (University of Helsinki)
    Abstract: This paper develops a theory of consumer boycotts. Some consumers care not only about the products they buy but also about whether the firm behaves ethically. Other consumers do not care about the behavior of the firm but yet may like to give the impression of being ethical consumers. Consequently, to affect a firm’s ethical behavior, moral consumers refuse to buy from an unethical firm. Consumers who do not care about ethical behavior may join the boycott to (falsely) signal that they do care. In the firm’s choice between ethical and unethical behavior, the optimality of mixed and pure strategies depends on the cost of behaving ethically. In particular, when the cost is (relatively) low, ethical behavior arises from a prisoners’ dilemma as the firm’s optimal strategy.
    Keywords: firm’s ethical code, consumer morality, boycotts
    JEL: M14 D43
    Date: 2008–05

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