nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2008‒11‒04
three papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. Competition and the Ratchet Effect By Gary Charness; Marie-Claire Villeval; Peter Kuhn
  2. Bank Competition and Collateral: Theory and Evidence By Christa Hainz; Laurent Weill; Christophe J. Godlewski
  3. Labor market discrimination as an agency cost By Pierre-Guillaume Méon; Ariane Szafarz

  1. By: Gary Charness (Department of Economics - University of California, Santa Barbara); Marie-Claire Villeval (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Peter Kuhn (Department of Economics, University of California - University of California, Santa Barbara)
    Abstract: The ‘ratchet effect’ refers to a situation where a principal uses private information that is revealed by an agent’s early actions to the agent’s later disadvantage, in a context where binding multi-period contracts are not enforceable. In a simple, context-rich environment, we experimentally study the robustness of the ratchet effect to the introduction of ex post competition for principals or agents. While we do observe substantial and significant ratchet effects in the baseline (no competition) case of our model, we find that ratchet behavior is nearly eliminated by labor-market competition ; interestingly this is true regardless of whether market conditions favor principals or agents.
    Keywords: Ratchet effect, competition, experiment, private information, labor markets
    Date: 2008
  2. By: Christa Hainz (University of Munich); Laurent Weill (Laboratoire de Recherche en Gestion et Economie, Institut d'Etudes Politiques, Strasbourg); Christophe J. Godlewski (Laboratoire de Recherche en Gestion et Economie, Université Louis Paster)
    Abstract: We investigate the impact of bank competition on the use of collateral in loan contracts. We develop a theoretical model incorporating information asymmetries in a spatial competition framework where banks choose between screening the borrower and asking for collateral. We show that the presence of collateral is more likely when bank competition is low. We then test this prediction empirically on a sample of bank loans from 70 countries. We perform logit regressions of the presence of collateral on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions that bank competition reduces the presence of collateral. These findings survive several robustness checks.
    Keywords: Collateral, Bank Competition, Asymmetric information.
    JEL: G21 D43 D82
    Date: 2008
  3. By: Pierre-Guillaume Méon (DULBEA, Université libre de Bruxelles, Brussels); Ariane Szafarz (DULBEA, Université libre de Bruxelles, Brussels)
    Abstract: This paper studies labor 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 they are unlikely to fully eliminate discrimination. Moreover, the model predicts that sectors with high skill leverages discriminate less. Finally, the impacts of unknown taste for discrimination, of a wage gap between groups, and of a diversity premium are investigated.
    Keywords: discrimination, agency theory, hiring.
    JEL: J71 D21 M12 M51
    Date: 2008–10

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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