nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2009‒07‒03
ten papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. The Theory of Incentives Applied to the Transport Sector By Elisabetta Iossa; David Martimort
  2. Finite State Dynamic Games with Asymmetric Information: A Framework for Applied Work By Fershtman, Chaim; Pakes, Ariel
  3. On Reputational Rents as an Incentive Mechanism in Competitive Markets By Bernardita Vial; Felipe Zurita
  4. Endogenous managerial incentive contracts in a differentiated duopoly, with and without commitment By Constantine Manasakis; Evangelos Mitrokostas; Emmanuel Petrakis
  5. Risk Sharing, Inequality and Fertility By Roozbeh Hosseini; Larry E. Jones; Ali Shourideh
  6. Revenue and Efficiency in Multi-Unit Uniform-Price Auctions By Michal Bresky
  7. Decision Making and Learning in a Globalizing World By Otto H. Swank; Bauke Visser
  8. Strategic versus Financial Investors: The Role of Strategic Objectives in Financial Contracting By Stefan Arping; Sonia Falconieri
  9. Grading Exams: 100, 99, 98,...or A, B, C? By Pradeep Dubey; John Geanakoplos
  10. How Communication Improves Efficiency in Bargaining: Reconciling Theory with Evidence By Saran Rene

  1. By: Elisabetta Iossa; David Martimort
    Abstract: Building upon Iossa and Martimort (2008), we study the main incentive issues and the form of optimal contracts for Public Private Partnerships (PPPs) in transports. We present a basic model of procurement in a multitask environment in which a risk-averse firm chooses unobservable efforts in infrastructure and service quality. We begin by analyzing the effect on incentives and risk transfer of bunding building and operation into a single contract. We consider the factors that affect the optimal allocation of demand risk and their implications for the choice of contract length. We discuss the dynamics of PPP contracts and how the risk of regulatory opportunism affects design and incentives.
    Date: 2009–02
  2. By: Fershtman, Chaim; Pakes, Ariel
    Abstract: With applied work in mind, we define an equilibrium notion for dynamic games with asymmetric information which does not require a specification for players' beliefs about their opponent types. This enables us to define equilibrium conditions which, at least in principal, are testable and can be computed using a simple reinforcement learning algorithm. We conclude with an example that endogenizes the maintenance decisions for electricity generators in a dynamic game among electric utilities in which the costs states of the generators are private information.
    Keywords: Applied Markov Equilibrium; Dynamic Games; Dynamic Oligopoly
    JEL: C63 C73 L13
    Date: 2009–06
  3. By: Bernardita Vial; Felipe Zurita
    Date: 2009–06–22
  4. By: Constantine Manasakis (Department of Economics, University of Crete, Greece); Evangelos Mitrokostas (Department of Economics, University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: In a differentiated Cournot duopoly, we examine the contracts that firms' owners use to compensate their managers and the resulting output levels, profits and social welfare. If products are either sufficiently differentiated or sufficiently close substitutes, owners use Relative Performance contracts. For intermediate levels of product substitutability, they use Market Share contracts. When owners do not commit over the types of contracts, each type is an owner's best response to his rival's choice. Product substitutability has differential effects on output levels and profits, depending on the configuration of contracts in the industry. Finally, managerial incentive contracts are welfare enhancing if they increase consumers' surplus.
    Keywords: Oligopoly; Managerial delegation; Endogenous contracts
    JEL: D43 L21
    Date: 2009–06–15
  5. By: Roozbeh Hosseini; Larry E. Jones; Ali Shourideh
    Abstract: We use an extended Barro-Becker model of endogenous fertility, in which parents are heterogeneous in their labor productivity, to study the efficient degree of consumption inequality in the long run. In our environment a utilitarian planner allows for consumption inequality even when labor productivity is public information. We show that adding private information does not alter this result. We also show that the informationally constrained optimal insurance contract has a resetting property - whenever a family line experiences the highest shock, the continuation utility of each child is reset to a (high) level that is independent of history. This implies that there is a non-trivial, stationary distribution over continuation utilities and there is no mass at misery. The novelty of our approach is that the no-immiseration result is achieved without requiring that the objectives of the planner and the private agents disagree. Because there is no discrepancy between planner and private agents' objectives, the policy implications for implementation of the efficient allocation differ from previous results in the literature. Two examples of these are: 1) estate taxes are positive and 2) there are positive taxes on family size.
    JEL: C61 D30 D63 D64 H21 H23 H43
    Date: 2009–06
  6. By: Michal Bresky
    Abstract: I show that in a private value multi-unit uniform-price auction, the reservation price increases both the efficiency and revenue. In equilibrium the difference between the true value of a unit and the submitted bid (shading) is different for each unit; therefore, the seller cannot allocate units efficiently, i.e., to those who value them the most. When the seller increases the reservation price, the bidders increase their bids on the units with greater shading. Then more often the units are allocated among those who have higher values for them, that is, efficient, although some bidders with a low value do not participate in the auction. In contrast to some other auction formats, for a low range of reservation prices, the higher the reservation price, the higher is both the expected efficiency and revenue
    Keywords: Multi-unit auction, multiple-object auction, market efficiency, optimal selling mechanism, discriminatory and uniform price auction with reservation price.
    JEL: D44
    Date: 2009–05
  7. By: Otto H. Swank; Bauke Visser
    Abstract: Decision-makers can benefit from the experience of others with solutions to common problems. If a best practice exists, the challenge is to recognize it and to ensure its diffusion. Information about different solutions is often dispersed, and decision-makers may be reluctant to switch for reputational reasons. We study how (i) the assignment of decision rights (who decides on the solutions.implementation?) and (ii) globalization (who knows what about solutions adopted in other places?) in.uence both the quality of the information on locally adopted solutions that decision-makers exchange and the quality of the solutions that are actually being used next.
    Keywords: centralization, decentralization, learning, cheap talk, reputational concerns, globalization, health care consensus panels, EU Open Method of Coordination
    JEL: D02 D70 D83
    Date: 2009
  8. By: Stefan Arping (University of Amsterdam); Sonia Falconieri (Brunel University)
    Abstract: Strategic investors, such as corporate venture capitalists, engage in the financing of start-up firms to complement their core businesses and to facilitate the internalization of externalities. We argue that while strategic objectives make it more worthwhile for an investor to elicit high entrepreneurial effort, they can also undermine his commitment to penalize poorly performing entrepreneurs by terminating their projects. Based on this tradeoff we develop a theory of financing choice between strategic and financial investors. Our framework provides insights into the design of corporate venturing deals and the choice between corporate venturing and independent venture capital finance.
    Keywords: Corporate Venturing; Soft Budget Constraint
    JEL: G20 G24 G32
  9. By: Pradeep Dubey (SUNY, Stonybrook); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: We introduce grading into games of status. Each player chooses effort, pro­ducing a stochastic output or score. Utilities depend on the ranking of all the scores. By clustering scores into grades, the ranking is coarsened, and the incen­tives to work are changed. We apply games of status to grading exams. Our main conclusion is that if students care primarily about their status (relative rank) in class, they are often best motivated to work not by revealing their exact numerical exam scores (100, 99, ...,1), but instead by clumping them into coarse categories (A,B,C). When student abilities are disparate, the optimal absolute grading scheme is always coarse. Furthermore, it awards fewer A’s than there are alpha-quality students, creating small elites. When students are homogeneous, we characterize optimal absolute grading schemes in terms of the stochastic dominance between student performances (when they shirk or work) on subintervals of scores, show­ing again why coarse grading may be advantageous. In both the disparate case and the homogeneous case, we prove that ab­solute grading is better than grading on a curve, provided student scores are independent.
    Keywords: Status, Grading, Incentives, Education, Exams
    JEL: C70 I20 I30
    Date: 2009–06
  10. By: Saran Rene (METEOR)
    Abstract: Previous theoretical literature proved the existence of an upper bound on efficiency in bilateral bargaining. In contrast, experiments consistently find players obtaining higher efficiency than the upper bound if they are allowed to communicate before the 1/2-double auction. We bridge this gap between theory and experiments by introducing an epsilon proportion of behavioral-type players who always truthfully reveal their valuations and declare a keenness to trade before bidding in the 1/2-double auction. Preplay communication is used by the strategic types to communicate their "tougher'''' bargaining position, forcing the behavioral types to adopt a "weaker'''' position. This further induces the strategic types to decrease the shading/exaggeration in the announcement of their valuations lest they miss the chance to trade with the "weaker'''' behavioral types. As a result, for any epsilon>0, the efficiency in equilibrium is greater than the upper bound.
    Keywords: microeconomics ;
    Date: 2009

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