nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2008‒11‒18
ten papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. Livestock Disease Indemnity Design When Moral Hazard is Followed by Adverse Selection By Gramig, Benjamin M.; Horan, Richard D.; Wolf, Christopher A.
  2. On the Non-Contractual Nature of Donor-Recipient Interaction in Development Assistance By Murshed, S. Mansoob
  3. Aligning Incentives for Accelerated Heifer Growth in Custom Heifer Growing Contracts By OLYNK, Nicole J.; WOLF, Christopher A.
  4. Marketing Agreement, Food Safety and Contract Design By Liang, Jing; Jensen, Helen H.
  5. Self-Enforcing Stochastic Monitoring and the Separation of Debt and Equity Claims By Harold L. Cole
  6. When should biodiversity tenders contract on outcomes? By Gorddard, Russell; Whitten, Stuart; Reeson, Andrew
  7. General equilibrium with private state verification By Joao Correia-da-Silva; Carlos Herves-Beloso
  8. Competition and Altruism in Microcredit Markets By Paolo Casini
  9. Unravelling in Two-Sided Matching Markets and Similarity of Preferences By Hanna W. Halaburda
  10. On the optimal design of income support and agri-environmental regulation By Bontems, Philippe

  1. By: Gramig, Benjamin M.; Horan, Richard D.; Wolf, Christopher A.
    Abstract: Averting or limiting the outbreak of infectious disease in domestic livestock herds is an economic and potential human health issue that involves both the government and individual livestock producers. Producers have private information about preventive biosecurity measures they adopt on their farms prior to outbreak (ex ante moral hazard), and following outbreak they possess private information about whether or not their herd is infected (ex post adverse selection). We investigate how indemnity payments can be designed to provide incentives to producers to invest in biosecurity and report infection to the government, while simultaneously addressing the information asymmetry between producers and the government. We show how addressing the adverse selection problem leads to a risk-sharing tradeoff in the moral hazard problem. We compare the relative magnitude of the first- and second-best levels of biosecurity investment and indemnity payments to further demonstrate the tradeoff between risk-sharing and efficiency, and we discuss the implications for status quo U.S. policy.
    Keywords: Food Consumption/Nutrition/Food Safety, Livestock Production/Industries, Risk and Uncertainty,
    Date: 2008
  2. By: Murshed, S. Mansoob
    Abstract: This paper analyses three issues in strategic donor-recipient interaction motivated by the complexity of the rationale underlying aid. The first is when we have several principals with conflicting objectives. Any one principal cannot offer high powered incentives -Date the agent -Date carry out their designated task. The second is -Date do with the fact that effort associated with ensuring aid effectiveness may concern both principal and agent; the optimal solution -Date which requires difficult -Date design cooperative behaviour. Consequently, the contractual type principal-agent relationship between donors and recipients is inappropriate. We need -Date consider models that signal recipient quality or commitment -Date reform. A simple model of signalling with commitment problems is presented, along with extensions -Date multiple types of agents and time periods, as well as possible solutions involving mechanism design.
    Keywords: aid, conditionality, contracting, signalling quality, mechanism design
    Date: 2008
  3. By: OLYNK, Nicole J.; WOLF, Christopher A.
    Abstract: Dairy managers today are faced with the decision to either raise their own replacements on the dairy farm or send heifers to a custom heifer grower. The largest potential challenge of contracting out the heifer raising enterprise revolves around the potential for a moral hazard problem because of hidden action on the part of the custom heifer grower. A principal-agent framework was used to elicit contract terms which provide incentives for the custom heifer grower to perform accelerated growth without heifers becoming over-conditioned. In order to provide incentives to custom growers, heifers returned to the dairy farm should be compared in performance to other heifers of similar age. We solve for the price paid per pound of gain, price paid for inch of wither height above the average heifer on the operation, deduction per unit of body condition score over or under ideal body condition score, and percent of the value of milk production above the average milk production by herd peers. Such comparisons are similar to tournament contracts, such as those used in raising poultry or swine.
    Keywords: farm management, production economics, contracts, heifer growth, moral hazard, Livestock Production/Industries,
    Date: 2008
  4. By: Liang, Jing; Jensen, Helen H.
    Abstract: Recent outbreaks of food-borne illness related to fruit and vegetables have led to increased concerns about the safety of produce. In response, the industry has adopted marketing agreements to ensure consistency of product safety. Contracts now are widely used between processors and growers to specify product safety attributes. This paper uses a principal-agent model to examine how the inclusion of a marketing agreement influences the behavior of growers and processors under processor-grower contracts. We conclude that: (1) the processor offers a contract with a higher premium and a lower base payment under the contract with a marketing agreement (2) contract parameters change in similar manner under the two contracts (3) under a contract with a marketing agreement the processor earns less profit. The individual contract scenarios are discussed in detail.
    Keywords: contract, food safety, principal-agent, market agreements, GAPs, on-farm inspection, Food Consumption/Nutrition/Food Safety, Marketing,
    Date: 2008
  5. By: Harold L. Cole
    Abstract: This paper studies the incentive issues associated with self-enforcing stochastic monitoring in a model of investment and production. The efficient contract features a debt-like payment with a threshold in terms of the reported output in which all of the reported output is taken up to the threshold if monitoring doesn't occur and all of the output is taken if monitoring does occur. An output report above the threshold leads to zero probability of monitoring and just the threshold amount being paid out. The efficiency gap between the self-enforcing contract and the commitment constraint is minimized when the monitors hold no part of the residual claim on the firm, which we associate with equity. Misreporting by the manager is an important component of the efficient contract.
    JEL: G3
    Date: 2008–11
  6. By: Gorddard, Russell; Whitten, Stuart; Reeson, Andrew
    Abstract: Making conservation program payments conditional on outcomes offers potential efficiency and innovation improvements over input based contracts. This paper explores the trade-offs involved in choosing the payment criteria for biodiversity tenders. A model where the budget for a conservation tender can be allocated to input, outcome or mixed payments is used to explore the impacts of hidden actions, adverse selection, and landholder risk aversion on the optimal policy design. We discuss the implications of these results for the design of the €؎est Egg€٠ tender. This tender is targeting habitat and breeding of ground-nesting birds in the New South Wales Murray Catchment.
    Date: 2008
  7. By: Joao Correia-da-Silva; Carlos Herves-Beloso
    Date: 2008–11–07
  8. By: Paolo Casini
    Abstract: We analyze the effects of entry in a previously monopolistic microcredit market characterized by asymmetric information and by institutions that offer only one type of contract. We consider different behavioral assumptions concerning the Incumbent and study their influence on equilibrium predictions. We show that competition leads to contract differentiation but can make borrowers worse off. Moreover, the screening process creates a previously unexplored source of rationing. We show that if the incumbent institution is altruistic, rationing is reduced and that this can positively affect the competitor's profit.
    Keywords: Microfinance, Competition, Altruism, Differentiation, Credit Rationing
    JEL: G21 L13 L31 O16
    Date: 2008
  9. By: Hanna W. Halaburda (Harvard Business School, Strategy Unit)
    Abstract: This paper investigates the causes and welfare consequences of unravelling in two-sided matching markets. It shows that similarity of preferences is an important factor driving unravelling. In particular, it shows that under the ex-post stable mechanism (the mechanism that the literature focuses on), unravelling is more likely to occur when participants have more similar preferences. It also shows that any Pareto-optimal mechanism must prevent unravelling, and that the ex-post stable mechanism is Pareto-optimal if and only if it prevents unravelling.
    Keywords: two-sided matching, unravelling, similarity of preferences
    JEL: C72 C78 D82
    Date: 2008–11
  10. By: Bontems, Philippe
    Abstract: In this paper, we develop a model of regulation for a set of heterogenous farmers whose production yields to environmental externalities. The goal of the regulator is first to offer some income support depending on collective preferences towards income redistribution and second to internalize externalities. The optimal policy is constrained by the information available. We first consider the second best where the regulator is able to observe all individuals decisions in terms of inputs and individual profit, but not the individual farming labor supply. We characterized the generalized transfer in function of the desire to redistribute and the underlying characteristics of the production process. In a second step, we assume that the regulator has only information on aggregate consumption of inputs and hence can only tax/subsidy linearly inputs and output. However, because the accounting profit remains observable, a non linear transfer of profit is still part of the optimal policy. In the last part of the paper, we endogenize the market price of land and examine how the optimal policy should be modified.
    Keywords: asymmetric information, agricultural policy, agri-environmental policy, income support, Agricultural and Food Policy, Environmental Economics and Policy, Q18, Q12, Q58,
    Date: 2008

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