nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2009‒08‒22
nine papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. Bait Contracts By Marie-Louise Vierø
  2. Dynamic taxation, private information and money By Christopher J. Waller
  3. Employment Fluctuations with Downward Wage Rigidity: The Role of Moral Hazard By Costain, James; Jansen, Marcel
  4. Reputation and Credit Market Formation: How Relational Incentives and Legal Contract Enforcement Interact By Fehr, Ernst; Zehnder, Christian
  5. Bargaining and social structure By Edoardo Gallo
  6. Quasi-Hyperbolic Discounting and Mixed Taxation By Aronsson, Thomas; Sjögren, Tomas
  7. Science and teaching: Two-dimensional signalling in the academic job market By Schneider, Andrea
  8. Endogenous Information Acquisition in Coordination Games By David P. Myatt; Chris Wallace
  9. Unemployment insurance with a hidden labor market By Fernando Álvarez-Parra; Juan M. Sanchez

  1. By: Marie-Louise Vierø (Queen's University)
    Abstract: The granting of stock options to employees who have negligible impact on company performance intuitively violates Holmstrom's (1979) sufficient statistic result. This paper revisits the sufficient statistic question of when to condition a contract on an outside signal in a principal-agent model in which I introduce imprecise (or vague) information. The paper applies a choice theoretic framework introduced in Olszewski (2007) and Ahn (2008) and extended by Viero (2009a), who denoted it vague environments. I show that if the signal is vague, Holmstrom's result can be overturned.
    Keywords: contracts, vagueness, optimism, incentives, signals, stock options
    JEL: D82 D80 D20 D86
    Date: 2009–08
  2. By: Christopher J. Waller
    Abstract: The objective of this paper is to study optimal fiscal and monetary policy in a dynamic Mirrlees model where the frictions giving rise to money as a medium of exchange are explicitly modeled. The framework is a three period OLG model where agents are born every other period. The young and old trade in perfectly competitive centralized markets. In middle age, agents receive preference shocks and trade amongst themselves in an anonymous manner. Since preference shocks are private information, in a record-keeping economy, the planner's constrained allocation trades off efficient risk sharing against production efficiency in the search market. In the absence of record-keeping, the government uses flat money as a substitute for dynamic contracts to induce truthful revelation of preferences. Inflation affects agents' incentive constraints and so distortionary taxation of money may be needed as part of the optimal policy even if lump-sum taxes are available.
    Keywords: Money ; Taxation
    Date: 2009
  3. By: Costain, James (Banco de Espana); Jansen, Marcel (Universidad Carlos III de Madrid)
    Abstract: This paper studies the cyclical dynamics of Mortensen and Pissarides' (1994) model of job creation and destruction when workers' effort is not perfectly observable, as in Shapiro and Stiglitz (1984). An occasionally-binding no-shirking constraint truncates the real wage distribution from below, making firms' share of surplus weakly procyclical, and may thus amplify fluctuations in hiring. It may also cause a burst of inefficient firing at the onset of a recession, separating matches that no longer have sufficient surplus for incentive compatibility. On the other hand, since marginal workers in booms know firms cannot commit to keep them in recessions, they place little value on their jobs and are expensive to motivate. For a realistic calibration, this last effect is by far the strongest; even a moderate degree of moral hazard can eliminate all fluctuation in the separation rate. This casts doubt on Ramey and Watson's (1997) "contractual fragility" mechanism, and means worker moral hazard only makes the "unemployment volatility puzzle" worse. However, moral hazard has potential to explain other labor market facts, because it is consistent with small but clearly countercyclical fluctuations in separation rates, and a robust Beveridge curve.
    Keywords: job matching, shirking, efficiency wages, endogenous separation, contractual fragility
    JEL: C78 E24 E32 J64
    Date: 2009–08
  4. By: Fehr, Ernst (University of Zurich); Zehnder, Christian (University of Lausanne)
    Abstract: The evidence suggests that relational contracting and legal rules play an important role in credit markets but on the basis of the prevailing field data it is difficult to pin down their causal impact. Here we show experimentally that relational incentives are a powerful causal determinant for the existence and performance of credit markets. In fact, in the absence of legal enforcement and reputation formation opportunities the credit market breaks down almost completely while if reputation formation is possible a stable credit market emerges even in the absence of legal enforcement of debt repayment. Introducing legal enforcement of repayments causes a further significant increase in credit market trading but has only a surprisingly small impact on overall efficiency. The reason is that legal enforcement of debt repayments weakens relational incentives and exacerbates another moral hazard problem in credit markets – the choice of inefficient high-risk projects.
    Keywords: credit markets, relationship lending, reputation formation, legal enforcement
    JEL: C91 G21 G28 L14
    Date: 2009–08
  5. By: Edoardo Gallo
    Abstract: This paper presents a bargaining model between individuals belonging to different groups where the equilibrium outcome depends on the communication network within each group. Belonging to a group gives an informational advantage: connections help to gather information about past transactions and this information can be used to make more accurate demands in future bargaining rounds. In the long-term there is a unique stochastically stable equilibruim which depends on the peripheral or least connected individuals in each group. Comparative statistics shows that a denser and more homogeneous network allows members of a group to obtain a better deal. An empirical analysis of the observed price differential between Asian and white buyers in New York’s Fulton fish market is consistent with these predictions. An extension explores an alternative set-up where buyers and sellers belong to the same communication network: if the network is regular and the agents are homogeneous then the equilibrium division in 50-50.
    Keywords: Network, Noncooperative bargaining, Core-periphery networks, Fulton fish market, 50-50 division.
    JEL: C73 C78 D83
    Date: 2009
  6. By: Aronsson, Thomas (Department of Economics, Umeå University); Sjögren, Tomas (Department of Economics, Umeå University)
    Abstract: This paper develops a dynamic model with endogenous labor supply, savings and health capital, where the consumers differ in ability as well as suffer from a self-control problem generated by quasi-hyperbolic discounting. The purpose is to analyze how a paternalistic government, which implements a time-consistent mix of labor income taxation, capital income taxation and commodity taxation, ought to use this tax system for purposes of redistribution and correction when individual ability is private information. Among the results, we show how the (nonlinear) income taxes ought to be used as indirect instruments for influencing the commodity demand behavior at the individual level: the intuition is that linear commodity taxes are not flexible enough to achieve proper incentives for investments in health capital.
    Keywords: Quasi-Hyperbolic Discounting; asymmetric information; income taxation; commodity taxation
    JEL: D60 D82 H21 H23 I18
    Date: 2009–08–13
  7. By: Schneider, Andrea (Helmut Schmidt University, Hamburg)
    Abstract: Post-docs signal their ability to do science and teaching to get a tenure giving universities the possibility of separating highly talented agents from the low talented ones. However separating that means signalling effort for the highly talented becomes even more important in a two-dimensional signalling case. This attracts notice to time constraints. Under weak conditions separating equilibria do not exist if time constraints are binding. The existing equilibria are more costly but without additional information compared to the one-dimensional case. Considering this, the efficiency of the current two-dimensional academic job market signalling can be improved by switching to a one-dimensional one.
    Keywords: Multi-dimensional signalling; Academic job market; Teaching and Research
    JEL: D82 I23 J41
    Date: 2009–08–10
  8. By: David P. Myatt; Chris Wallace
    Abstract: In the context of a “beauty contest” coordination game (in which pay-offs depend on the proximity of actions to an unobserved state variable and to the average action) players choose how much costly attention to pay to various informative signals; they endogenously select information sources and how carefully to listen to them. Each signal has an underlying accuracy (how precisely it identifies the state variable) and a clarity (how easy it is for players to understand what the signal says). The unique information-acquisition equilibrium has interesting properties: only a subset of signals are assigned positive weight and attention; these are the clearest signals available, even if such signals have poor underlying accuracy; the size of the subset shrinks as the complementarity of players’ actions becomes more acute; and, if actions are more complementary, the information endogenously acquired in equilibrium is more public in nature.
    Keywords: Coordination games, Information acquisition, Publicity, Beauty-contest games
    JEL: C72 D83
    Date: 2009
  9. By: Fernando Álvarez-Parra; Juan M. Sanchez
    Abstract: This paper considers the problem of optimal unemployment insurance (UI) in a repeated moral hazard framework. Unlike existing literature, unemployed individuals can secretly participate in a hidden labor market. This extension modifies the standard problem in three dimensions. First, it imposes an endogenous lower bound for the lifetime utility that a contract can deliver. Second, it breaks the identity between unemployment payments and consumption. And third, it hardens the encouragement of search effort. The optimal unemployment insurance system in an economy with a hidden labor market is simple, with an initial phase in which payments are relatively flat during unemployment and with no payments for long-term unemployed individuals. This scheme differs substantially from the one prescribed without a hidden labor market and resembles unemployment protection programs in many countries.
    Date: 2009

This nep-cta issue is ©2009 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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