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on Contract Theory and Applications |
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Issue of 2009‒03‒14
thirteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | David B. Ridley |
| Date: | 2009–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:814577000000000174&r=cta |
| By: | Stefan Bühler; Dennis L. Gärtner |
| Abstract: | This paper provides a theoretical rationale for non-binding retail price recommendations (RPRs) in vertical supply relations. Analyzing a bilateral manufacturer-retailer relationship with repeated trade, we show that linear relational contracts can implement the surplusmaximizing outcome. If the manufacturer has private information about production costs or consumer demand, RPRs may serve as a communication device from manufacturer to retailer. We characterize the properties of efficient bilateral relational contracts with RPRs and discuss extensions to settings where consumer demand is affected by RPRs, and where there are multiple retailers or competing supply chains. |
| Keywords: | vertical relationships, relational contracts, asymmetric information, price recommendations |
| JEL: | D23 D43 L14 L15 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2009:2009-02&r=cta |
| By: | Alexander K. Koch; Albrecht Morgenstern; Philippe Raab (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | Holmström’s (1982/99) career concerns model has become a workhorse for analyzing agency issues in many fields. The underlying signal jamming argument requires players to use information in a Bayesian way, which is difficult to directly test with field data: typically little is known about the information that individuals base their decisions on. Our laboratory experiment provides prima facie evidence: i) the signal jamming mechanism successfully creates incentives on the labor supply side; ii) decision errors take time to decrease; iii) while subjects’ average beliefs are remarkably consistent with play, a mild winner’s curse arises on the labor demand side. |
| Keywords: | Incentives, Reputation, Career concerns, Signal jamming, Experiments |
| JEL: | C91 D83 L14 |
| Date: | 2009–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2009-01&r=cta |
| By: | Hoppe, Eva I.; Schmitz, Patrick W. |
| Abstract: | In the contract-theoretic literature, there is a vital debate about whether contracts can mitigate the hold-up problem when renegotiation cannot be prevented. Ultimately, the question has to be answered empirically. As a first step in that direction, we have conducted a laboratory experiment with 490 participants. We consider "cooperative" investments that directly benefit the non-investing party. While according to standard theory, contracting would be useless if renegotiation cannot be ruled out, we find that option contracts significantly improve investment incentives compared to a no-contract treatment. This finding can be explained by Hart and Moore’s (2008) notion that contracts may serve as reference points. |
| Keywords: | Experiment; Hold-up problem; Option contracts; Renegotiation |
| JEL: | C72 C91 D86 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7205&r=cta |
| By: | Kaniska Dam (CIDE); Marc Escrihuela-Villar (Universitat de les Illes Balears); Santiago Sánchez-Pagés (Edinburgh School of Economics) |
| Abstract: | We analyse risk-taking behaviour of banks in the context of spatial competition. Banks mobilise unsecured deposits by offering deposit rates, which they invest either in a prudent or in a gambling asset. Limited liability along with high return of a successful gamble induce moral hazard at the bank level. We show that when the market concentration is low, banks invest in the gambling asset. On the other hand, for sufficiently high levels of market concentration, all banks choose the prudent asset to invest in. We further show that a merger of two neighboring banks increases the likelihood of prudent behaviour. Finally, introduction of a deposit insurance scheme exacerbates banks’ moral hazard problem. |
| Keywords: | Market concentration; Bank mergers; Risk-taking |
| JEL: | G21 L11 L13 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ubi:deawps:36&r=cta |
| By: | Ping Zhang (School of Economics, University of Nottingham) |
| Abstract: | We characterize pure strategy equilibria of common value multi-unit uniform price auctions under the framework of initial public offerings, where bidders have incomplete private information regarding the value of shares and submit discrete demand schedules. We show that there exists a continuum of equilibria where investors with a higher expectation about the value of shares bid for higher quantities at higher prices, and as a result the market price increases with the market value. The collusive equilibria, in which investors place bids regardless of their expectation about the value, are obtained under stricter conditions than in the continuous price case. |
| Keywords: | IPO, uniform price auction, divisible goods auction, share auction, tacit collusion |
| JEL: | D44 G12 D82 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cdx:dpaper:2009-05&r=cta |
| By: | Levent Ulku (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)) |
| Abstract: | We consider an optimal mechanism design problem with several heterogeneous objects and interdependent values. We characterize ex post incentives using an appropriate monotonicity condition and reformulate the problem in such a way that the choice of an allocation rule can be separated from the choice of the payment rule. Central to our analysis is the formulation of a regularity condition, which gives a recipe for the optimal mechanism. If the problem is regular, then an optimal mechanism can be obtained by solving a combinatorial allocation problem in which objects are allocated in a way to maximize the sum of "virtual" valuations. We identify conditions that imply regularity for two nonnested environments using the techniques of supermodular optimization. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cie:wpaper:0903&r=cta |
| By: | Alexander Stremitzer |
| Abstract: | When investments are non-verifiable, inducing cooperative investments with simple contracts may not be as difficult as previously thought. Indeed, modeling “expectation damages” close to legal practice, we show that the default remedy of contract law induces the ?rst best. Yet, in order to lower informational requirements of courts, parties may opt for a "specific performance" regime which grants the breached-against buyer an option to choose "restitution" if the tender’s value falls below some (arbitrarily chosen) quality threshold. In order to implement this regime, no more information needs to be verifiable than is implicitly assumed in Che and Hausch (1999). |
| Keywords: | breach remedies, incomplete contracts, cooperative investments. |
| JEL: | K12 L22 J41 C70 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse4_2009&r=cta |
| By: | Ludwig Ensthaler; Thomas Giebe (Institute of Economic Theory I, Humboldt University at Berlin, Spandauer Str.1, 10099 Berlin, Germany; Institute of Economic Theory I, Humboldt University at Berlin, Spandauer Str.1, 10099 Berlin, Germany) |
| Abstract: | A budget-constrained buyer wants to purchase items from a shortlisted set. Items are differentiated by quality and sellers have private reserve prices for their items. Sellers quote prices strategically, inducing a knapsack game. The buyer’s problem is to select a subset of maximal quality. We propose a buying mechanism which can be viewed as a game theoretic extension of Dantzig’s greedy heuristic for the classic knapsack problem. We use Monte Carlo simulations to analyse the performance of our mechanism. Finally, we discuss how the mechanism can be applied to award R&D subsidies. |
| Keywords: | Auctions, Subsidies, Market Design, Knapsack Problem |
| JEL: | D21 D43 D44 D45 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:254&r=cta |
| By: | Evelyn Korn (Faculty of Business Administration and Economics, Philipps-University Marburg); Stephan Meisenzahl (Faculty of Business Administration and Economics, Philipps-University Marburg) |
| Abstract: | Any cooperation that profits from relation-specific investments suffers from the well-known hold-up problem. If investments are not enforceable by an outside authority, the gains fall prey to individual opportunism caused by a free-rider problem. If, in addition, individual investments exhibit positive cross effects, Che and Hausch (1999) provide a negative result and show that contracts cannot overcome the hold up due to a lack of verifiable commitment. This paper develops a mechanism that provides such a commitment device: (1) It introduces an acknowledgement game that procures reliable. (2) It embeds the original contracting problem into two institutional designs - a market based one and a private design - that support enforcement. These two devices reestablish efficient investments as enforceable results of a contract. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:200909&r=cta |
| By: | Koch, Alexander K. (University of Aarhus); Morgenstern, Albrecht (Federal Ministry of Finance) |
| Abstract: | To innovate, employees need to develop novel ideas and coordinate with each other to turn these ideas into better products and services. Work outcomes provide signals about employees' abilities to the labor market, and therefore career concerns arise. These can both be 'good' (enhancing incentives for effort in developing ideas) and 'bad' (preventing voluntary coordination). Our model shows how the firm designs its explicit incentive system and organizes work processes to take these conflicting forces into account. The comparative statics results suggest a link between the increased use of teams and recent changes in labor market returns to skills. |
| Keywords: | career concerns, group incentives, knowledge work, reputation, teams |
| JEL: | D86 J30 L14 L20 M12 O30 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4039&r=cta |
| By: | Besancenot, Damien (CEPN and University Paris 13); Vranceanu, Radu (ESSEC Business School) |
| Abstract: | This paper analyzes the decision of a migrant to return or stay within the framework of a signaling model with exogenous migratory costs. If employers have only imperfect information about the type of a worker and good workers migrate, bad workers might copy their strategy in order to get the same high wage as the good workers. Employers will therefore reduce the wage they pay to migrants and good workers incur a loss compared to the perfect information setup. In one hybrid equilibrium of the game, the more bad workers migrate, the higher the incentive for good workers to come back. Policy implications follow |
| Keywords: | Temporary Migration; Return Migrants; Hybrid Bayesian Equilibrium; Signalling Model |
| JEL: | D82 F22 J61 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:essewp:dr-08017&r=cta |
| By: | Frank A.G. den Butter (VU University Amsterdam); Seung-gyu Jo (VU University Amsterdam) |
| Abstract: | In the economics profession there is a fierce debate whether industrial and innovation policy should be targeted to specific sectors or firms. This paper discusses the welfare effects of such targeted policies from the perspective of strategic game theory of the firm. A theoretical case for picking winners through a preferential innovative policy is discussed in a third-market international trade model, which is shown to hold without evoking retaliation from foreign competitors. However, in practice information uncertainties remain a concern. The question whether in this case ‘backing winners’ is a wise policy option depends on the characteristics of the information asymmetries and on the extent the government is able to design selection procedures which minimize the transaction costs that may be caused from the market participants’ opportunistic behavior. |
| Keywords: | Innovation policy; R&D subsidies; strategic trade policy; asymmetric information; spill-over effects |
| JEL: | C73 F12 O24 O32 |
| Date: | 2009–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090012&r=cta |