nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2008‒09‒20
nine papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. Reciprocity and Incentive Pay in the Workplace By Robert Dur; Arjan Non; Hein Roelfsema
  2. Political accountability, incentives, and Contractual design of public private partnerships By Athias, Laure
  3. Adverse selection and financing of innovation: is there a need for R&D subsidies? By Takalo , Tuomas; Tanayama , Tanja
  4. Adverse Selection and Entrepreneurship in a Model of Development By Esteban Jaimovich
  5. Monopoly, Non-linear Pricing, and Imperfect Information : A Reconsideration of the Insurance Market By Szalay, Dezsö
  6. Revenues in Discrete Multi-Unit, Common Value Auctions: A Study of Three Sealed-Bid Mechanisms By Ahlberg, Joakim
  7. Auctioning Public Office By Costas Roumanias
  8. Firm Collateral and the Cyclicality of Knowledge Intensity By Martinsson, Gustav
  9. Curse of Mediocrity - On the Value of Asymmetric Fundamental Information in Asset Markets By Michael Kirchler

  1. By: Robert Dur (Erasmus University Rotterdam, and CESifo); Arjan Non (Erasmus University Rotterdam); Hein Roelfsema (Utrecht University)
    Abstract: We study optimal incentive contracts for workers who are reciprocal to management attention. When neither worker's effort nor manager's attention can be contracted, a double moral-hazard problem arises, implying that reciprocal workers should be given weak financial incentives. In a multiple-agent setting, this problem can be resolved using promotion incentives. We test these predictions using German Socio-Economic Panel data. We find that workers who are more reciprocal are significantly more likely to receive promotion incentives, while there is no such relation for individual bonus pay.
    Keywords: reciprocity; social exchange; incentive contracts; double moral hazard; GSOEP
    JEL: D86 J41 M51 M52 M54 M55
    Date: 2008–09–03
  2. By: Athias, Laure
    Abstract: Service adaptations, when there is changing demand or problems regarding the service provision, constitute a major issue in Public Private Partnerships (PPPs). So far, studies have explained the ex post adaptation problems by the distorted incentives for the private public-service provider to invest in adaptation efforts. However, as any PPP is between a public authority and a private public-service provider (no market price), public authorities have also an important role to play in the adaptation of the private public-service provision over time. This paper studies how the contractual design of PPPs affects accountability and incentives for contractually unanticipated service adaptations. More specifically, we observe worldwide two main different contracting out procedures: the concession contract and the availability contract. The main difference between these two contractual practices concerns the demand risk, which is borne by private providers in the first case and by public authorities in the second case. This paper shows that there are two main effects of the contractual design on accountability. (1) Concession contracts, compared to availability contracts, motivate more public authorities from investigating and responding to public demands. This is due to the fact that under a concession contract consumers are empowered, i.e. have the possibility to oust the private provider, which provides public authorities with more credibility in side-trading. (2) Concession contracts can give greater adaptation effort incentives to private providers than availability contracts, since, if private providers bear the demand risk, they can receive private gains from implementing the adaptation. The striking policy implication of this paper is then that the trend towards a greater resort to contracts where private providers bear little or no demand risk may not be optimal in terms of allocative efficiency.
    Keywords: Political accountabiliy; Public services provision; Public Private Partnerships; Incomplete contracts; Consumers empowerment.
    JEL: D86 D23 H10 L51 O17
    Date: 2007–12–02
  3. By: Takalo , Tuomas (Bank of Finland Research); Tanayama , Tanja (Helsinki Center of Economic Research (HECER))
    Abstract: We study the interaction between private and public funding of innovative projects in the presence of adverse-selection based financing constraints. Government programmes allocating direct subsidies are based on ex-ante screening of the subsidy applications. This selection scheme may yield valuable information to market-based financiers. We find that under certain conditions, public R&D subsidies can reduce the financing constraints of technology-based entrepreneurial firms. Firstly, the subsidy itself reduces the capital costs related to innovation projects by reducing the amount of market-based capital required. Secondly, the observation that an entrepreneur has received a subsidy for an innovation project provides an informative signal to market-based financiers. We also find that public screening works more efficiently if it is accompanied by subsidy allocation.
    Keywords: adverse selection; innovation finance; financial constraints; R&D subsidies; certification
    JEL: D82 G28 H20 O30 O38
    Date: 2008–09–09
  4. By: Esteban Jaimovich
    Abstract: This paper presents a theory in which risk-averse heterogeneously talented entrepreneurs are the key agents driving the process of development and modernisation. Entrepreneurial skills are private information, which prevents full risk sharing. In that setup, development to a modern industrial economy might fail to take place, since potentially talented entrepreneurs may refrain from taking on the entrepreneurial risks as a way to avoid income shocks. An interesting feature of the model is that the informational asymmetries in the economy are endogenous to the process of development, as they are related to the heterogeneity in entrepreneurial skills required in the manufacturing activities.
    Keywords: Adverse Selection, Development, Entrepreneurship, Risk-Sharing
    JEL: O12 O16 D81 D82
    Date: 2008
  5. By: Szalay, Dezsö (Economics Department, University of Warwick.)
    Abstract: I reconsider Stiglitz's (1977) problem of monopolistic insurance with a continuum of types. Using a suitable transformation of control variables I obtain an analytical characterization of the optimal insurance policies. Closed form solutions and comparative statics results for special cases are provided.
    Keywords: nonlinear pricing ; screening ; risk aversion
    JEL: D82
    Date: 2008
  6. By: Ahlberg, Joakim (VTI)
    Abstract: We propose in this paper a discrete bidding model, both on quantities and in pricing. It has a two-unit demand environment where subjects bid for contracts with an unknown redemption value, common to all bidders. Prior to bidding, the bidders receive private signals of information on the (common) value. Both the value and the signals are drawn from a known discrete affiliated joint distribution. <p> The relevant task for the paper is to compare equilibrium strategies and the seller's revenue between the three auction formats. We find that, among the three auction formats below with two players, the Vickrey auction always gives the most revenue to the seller, where the discriminatory auction becomes second and the uniform auction last. We also find that, in equilibrium, bidders bid the same amount on both items in the discriminatory auction; a phenomenon we do not notice in either of the other two auction formats. There, different amount of demand reduction is encountered.
    Keywords: Multi-Unit Auction; Common Value Auction; Discrete Auction; Game Theory
    JEL: C72 D44
    Date: 2008–09–10
  7. By: Costas Roumanias (Department of Economics, University of Macedonia)
    Abstract: Campaign promises and campaign spending are modelled as integral parts of a signaling mechanism that transmits information about can- didates' abilities and proposed policies to the voters. We suggest that viewing promises and spending as inseparable parts of the same mechanism is essential in moving towards providing a microfoundation framework of political campaigns. Political competition in spending and promising is modeled as an auction which enables us to derive results about the laws governing political campaigns. The degree of commitment is crucial to the mixture of signaling used by candidates.
    Keywords: Auctions, Elections, Political Competition, Political Campaigns, Campaign Promises, Campaign Spending.
    JEL: D02 D44 D72 D86
    Date: 2008–09
  8. By: Martinsson, Gustav (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: The Schumpeterian view on Business cycles treats recessions as a cleansing mechanism and a state where firms can regroup and innovate. Firms need to access finance externally in order to compensate declining cash flow in recessions. Due to financial frictions, the literature proposes that firms need to post collateral in order to mitigate problems of information asymmetries. In this paper I view knowledge within a firm as a prerequisite for it to be innovative. Combining financial frictions and firm knowledge intensity the overall hypothesis of this paper is: Firms which have collateral can retain its knowledge intensity when cash flow declines. This enables firms with collateral to benefit from recessions like Schumpeter proposed. In this paper I explore the impact of firm collateral on the cyclicality of knowledge intensity. This is conducted through using firm level data on 14,500 Swedish manufacturing firms over the period 1997-2004. The main results are: (i) the knowledge intensity of a firm without collateral is pro-cyclical. I.e. its share of highly educated employees is positively correlated with sales variation; (ii) on the other hand, the knowledge intensity of firms with collateral is counter-cyclical. Through retaining their knowledge intensity even as sales drops firms with collateral can benefit from recessions as Schumpeter proposed.
    Keywords: incomplete markets; asymmetric information; business fluctuations; business cycles; corporate finance; innovation
    JEL: D52 D82 E32 O16 O31
    Date: 2008–09–09
  9. By: Michael Kirchler
    Abstract: In this paper we present results from experimental asset markets and simulations with traders who receive asymmetric information about the fundamental value of an asset. In the experimental markets with repetition insiders outperform the market and uninformed random traders perform equally well as average informed traders. This is in line with the results of the equilibrium simulation output in which traders choose be- tween a random strategy and their fundamental strategy. We further ¯nd that the persistent underperformance of the average informed is not due to their overcon¯dence but due to the asymmetric information structure of the market.
    Keywords: Information economics, experimental economics, agent-based model, overconfidence, value of information
    JEL: C91 C92 G14
    Date: 2008–09

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