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on Contract Theory and Applications |
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Issue of 2009‒10‒10
fourteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | James M. Malcomson |
| Abstract: | Risk-neutral individuals take more risky decisions when they have limited liability. Risk-neutral managers may not when acting as agents under contract and taking costly actions to acquire informatin before taking decisions. Limited liability makes it optimal to increase the reward for outcomes relatively more likely to arise from desirable than from undesirable actions. The resulting decisions may be less, rather than more, risky. Making a decision after acquiring information provides an additional reason to those in the classic principal-agent literature for using contracts with pay increasing in the return. Further results on the form of contracts are also derived. |
| Keywords: | Managers, Risky decisions, Limited liability, Principal-agent contracts, Asymmetric information |
| JEL: | D82 D86 J33 M52 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:453&r=cta |
| By: | Christelle Viauroux (UMBC); Barnali Gupta (Miami University) |
| Abstract: | We study the effects of a statutory wage tax sharing rule in a principal - agent framework with moral hazard (à la Holmstrom, 1979) using the approach of Bose, Pal, Sappington (2007) to model the stochastic relationship between the agent’s unobserved effort and his observed performance. The analysis indicates that tax sharing with positive legislated contributions from both the employer and employee does not maximize any of the outcomes - employee effort, wages, profits or welfare. Moreover, a rule which specifies a corner solution, with 100% of the tax statutorily levied on the employer will maximize effort, expected profit and expected welfare while 100% of the tax statutorily levied on the employee will maximize expected wages. |
| Keywords: | moral hazard, taxes, principal-agent model |
| JEL: | D8 H2 |
| Date: | 2009–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:umb:econwp:09105&r=cta |
| By: | André De Palma (ENS Cachan - Ecole Normale Supérieure de Cachan - Ecole Normale Supérieure de Cachan, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Luc Leruth (IMF Office in Europe - EUO); Guillaume Prunier (Ecole Polytechnique Palaiseau - (-)) |
| Abstract: | There is a strong economic rationale for close cooperation between the public and private sectors. This has resulted in a significant increase in the demand for the provision of public services through instruments combining public and private money such as public-private partnerships (PPPs or P3s). We describe these arrangements and explore how they can be analyzed using standard tools in economics (incentives and principal-agent theory). We discuss the implications of our approach in terms of identifying risks that are often overlooked before turining to the optimal risk-sharing between the public and private partners, in particular with respect to information asymmetries in risk perceptions. This allows us to propose a typology of the risks associated with PPPs, where both internal risks (the risks associated with the contract) and external risks (those associated with the project) are considered. |
| Keywords: | infrastructure financing, public-private partnerships, principal-agent framework, risk classification, transportation infrastructure, value for money |
| Date: | 2009–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00419234_v1&r=cta |
| By: | André de Palma; Guillaume Prunier; Luc Leruth |
| Abstract: | There is a strong economic rationale for close cooperation between the public and private sectors. This has resulted in a significant increase in the demand for the provision of public services through instruments combining public and private money such as public-private partnerships (PPPs or P3s). We describe these arrangements and explore how they can be analyzed using standard tools in economics (incentives and principal-agent theory). We discuss the implications of our approach in terms of identifying risks that are often overlooked before turining to the optimal risk-sharing between the public and private partners, in particular with respect to information asymmetries in risk perceptions. This allows us to propose a typology of the risks associated with PPPs, where both internal risks (the risks associated with the contract) and external risks (those associated with the project) are considered. |
| Keywords: | Burden sharing , Financial risk , Fiscal management , Fiscal transparency , Infrastructure , Private sector , Public enterprises , Public finance , Public sector , Transport , |
| Date: | 2009–08–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/177&r=cta |
| By: | Sandra Ludwig (University of Munich); Christina Strassmair (University of Munich) |
| Abstract: | Is free-riding in teams reduced when one member receives a signal on his colleagueís performance? And how does free-riding depend on the signal's type? We address these questions in experimental teams in which two agents sequentially exert effort to contribute to the team output. We vary the type of information the second mover receives prior to his effort choice and find that agents work more when signals are available. Overall, behavior differs from predictions of standard theory. Signals that are predicted to have no effect are, in fact, influential and signals that are predicted to have an effect are redundant. |
| Keywords: | Team production, Free-riding, Experiment, Information, Signal |
| JEL: | C92 J30 M50 D82 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:277&r=cta |
| By: | Wu, Steven Y. (Purdue University) |
| Abstract: | This study models producer protection legislation that would grant growers the right to claim damages (PPLD) if their contracts are prematurely terminated. In the absence of contracting frictions that prevent contractors from redesigning contracts to accommodate exogenous policy changes, PPLD would not be distortionary or redistributive. If contracting frictions exist, then PPLD would have efficiency and redistributive effects, though the direction and magnitude depends on the size of PPL damages vis-à-vis expected damages under existing contract law. This study clarifies the conditions under which PPLD would decrease efficiency and protect growers. |
| Keywords: | producer protection legislation, agricultural policy, moral hazard, contracts, contract law |
| JEL: | Q12 Q18 K12 D82 D86 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4373&r=cta |
| By: | Fossati, Amedeo; Montefiori, Marcello |
| Abstract: | Global public goods, differently from what it might be thought, are quite common in the real world. This work suggests that both the governments' struggle against Mafia and the prevention of immigration can be regarded as global public goods. We assume a federation of jurisdictions with two tiers of Government: the central and the local. Regional utility directly represents the preferences of citizens, since the local governments aim at individualistic utility maximization; central government uses the redistribution of resources among the members of the federation to maximize the social welfare which is given, as usual, by the sum of regional utilities. The Central Government aims at welfare maximization. To get its goal it has to find out the efficient way to fund and provide public goods taking into account not only their particular characteristics but also the fact that, in many circumstances, their production faces increasing cost, which may depend both on the quantity of good produced and on the type (high or low cost) of the producer (which, in this framework, coincides with the jurisdiction). Thus the first issue addressed by the paper concerns the choice between central and local provision. Furthermore, as far as the informational structure is concerned, the centre lacks information concerning the type of each region. Thus, the central government's key informational problem concerns the regional costs and quantities with regard both to the public and the private good. Indeed we assume that the centre can observe the expenditure levels but neither the costs nor the outputs associated with those expenditure levels. |
| Keywords: | global public good, asymmetric information, adverse selection, redistribution, Mafia |
| JEL: | H21 H41 H70 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:uca:ucapdv:131&r=cta |
| By: | Stefan Bauernschuster (University of Jena); Jörg Oechssler (Department of Economics, University of Heidelberg, Germany); Peter Duersch (University of Heidelberg); Radovan Vadovic (ITAM, Mexico City) |
| Abstract: | The question whether a minimum rate of sick pay should be mandated is much debated. We study the effects of this kind of intervention in an experimental labor market that is rich enough to allow for moral hazard, adverse selection, and crowding out of good intentions to occur. We find that higher sick pay is reciprocated by workers through higher effort but only if sick pay is not mandated. We also study adverse selection effects when workers have different probabilities of getting sick and can reject the hypothesis that this leads to market breakdown. Overall, we find that mandating sick pay actually leads to a higher voluntary provision of sick pay by ?rms. |
| Keywords: | sick pay, sick leave, experiment, gift exchange |
| JEL: | J3 C7 C9 |
| Date: | 2009–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2009-076&r=cta |
| By: | Roberto Serrano (Brown University and IMDEA Social Sciences); Rajiv Vohra (Brown University) |
| Abstract: | We characterize full implementation of social choice sets in mixed strategy Bayesian equilibrium. Our results concern both exact and virtual mixed implementation. For exact implementation, we identify a strengthening of Bayesian monotonicity, which we refer to as mixed Bayesian monotonicity. It is shown that, in economic environments with at least three agents, mixed Bayesian implementation is equivalent to mixed Bayesian monotonicity, incentive compatibility and closure. For implementing a social choice function, the case of two-agents is also covered by these conditions and mixed Bayesian monotonicity reduces to Bayesian monotonicity. Following parallel steps, mixed virtual implementation is shown to be equivalent to mixed virtual monotonicity, incentive compatibility and closure. The key condition, mixed virtual monotonicity, is argued to be very weak. In particular, it is weaker than Abreu-Matsushima\'s measurability, there by implying that: (1) virtual implementation in mixed Bayesian equilibrium is more permissive than virtual implementation in iteratively undominated strategies, and (2) non-regular mechanisms are essential for the implementation of rules in that gap. |
| Keywords: | exact implementation; approximate implementation; incomplete information; incentive compatibility; monotonicity |
| JEL: | C72 D78 D82 |
| Date: | 2009–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:imd:wpaper:wp2009-08&r=cta |
| By: | Florian Heiss; Daniel McFadden; Joachim Winter |
| Abstract: | We study the Medicare Part D prescription drug insurance program as a bellwether for designs of private, non-mandatory health insurance markets that control adverse selection and assure adequate access and coverage. We model Part D enrollment and plan choice assuming a discrete dynamic decision process that maximizes life-cycle expected utility, and perform counterfactual policy simulations of the effect of market design on participation and plan viability. Our model correctly predicts high Part D enrollment rates among the currently healthy, but also strong adverse selection in choice of level of coverage. We analyze alternative designs that preserve plan variety. |
| JEL: | C25 D12 H51 I11 I18 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15392&r=cta |
| By: | Ahmed Doghmi (Strategic Interaction Group, Max Planck Institute of Economics, Jena, Germany); Miloudi Kobiyh (Center for Research in Economics and Management, University of Caen, France) |
| Abstract: | In this paper, we introduce the concept of payoffi distortion in the standard prisoner's dilemma game when strategies are driven by psychological behaviors. This concept enables to take account each player's assessment of the other player's behavior and the asymmetry of information. We determine the conditions which allow that mutual cooperation constitutes the equilibrium. we particularly focus on the reciprocity in case of complete and incomplete information about the payoffi distortion. We show that mutual cooperation is a Nash equilibrium with complete information and is a Bayesian equilibrium when each player believes that his opponent behaves with "large" reciprocity in incomplete information environment. |
| Keywords: | Reciprocity, Behavior, Cooperation, prisoner's dilemma game. |
| JEL: | C7 A13 |
| Date: | 2009–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2009-072&r=cta |
| By: | Barlevy, Gadi (Federal Reserve Bank of Chicago); Neal, Derek (University of Chicago) |
| Abstract: | We propose an incentive pay scheme for educators that links educator compensation to the ranks of their students within appropriately defined comparison sets, and we show that under certain conditions our scheme induces teachers to allocate socially optimal levels of effort to all students. Because this scheme employs only ordinal information, our scheme allows education authorities to employ completely new assessments at each testing date without ever having to equate various assessment forms. Thus, our scheme removes incentives for teachers to teach to a particular assessment form and eliminates any opportunities to influence reward pay by corrupting the equating process or the scales used to report assessment results. Having shown that cardinal measures of achievement growth over time are not a necessary ingredient of incentive systems for educators, we note that education authorities can employ our scheme as a means of providing incentives for educators while employing a separate system for measuring growth in student achievement that involves no stakes for educators. This approach creates no incentives for educators to take actions that contaminate the measurement of student progress. |
| Keywords: | compensation, education, tournaments |
| JEL: | J33 I20 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4383&r=cta |
| By: | Kou, Zonglai; Zhou, Min |
| Abstract: | The paper develops a model of academic tenure based on multi-tasking and screening. A professor has two tasks, researching and teaching. We assume that researching performance is easy to measure but teaching performance is immeasurable. Then Holmtrom and Milgrom's (1991) classical muli-task principal-agent model implies that the only way for the the university to "incentivize" teaching activity is decreasing the incentive power to researching activity. This justifies the low-powered contract to tenured professors. However, with low-powered contract, the university will face serious informational problem in the process of enrollment, either transferring rents to the candidates with low ability if the wage level is high, or suffering from the potential occupational vacancy if the wage level is low. To this dilemma, the up-or-out contract is a possible solution. |
| Keywords: | Multi-tasking, Screening, Academic Tenure, Up-or-Out Contract |
| JEL: | D86 J41 J44 M55 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17670&r=cta |
| By: | Levent Kockesen (Koc University); Emanuele Gerratana |
| Abstract: | It is well known that non-renegotiable contracts with third parties may have an effect on the outcome of a strategic interaction and thus serve as a commitment device. We address this issue when contracts are renegotiable. More precisely, we analyze the equilibrium outcomes of twostage games with renegotiation-proof third-party contracts in relation to the equilibrium outcomes of the same game without contracts. We assume that one of the parties in the contractual relationship is unable to observe everything that happens in the game when played by the other party. This implies that contracts are incomplete and we show that such incompleteness restricts the set of equilibrium outcomes to a subset of Nash equilibrium outcomes of the game without contracts. Introducing renegotiation, in general, imposes further constraints and in some games implies that only subgame perfect equilibrium outcomes can be supported. However, there is a large class of games in which non-subgame perfect equilibriumoutcomes can also be supported, and hence, third-party contracts still have strategic implications even when they are renegotiable. |
| Keywords: | Third-Party Contracts, Strategic Delegation, Incomplete Contracts, Renegotiation |
| JEL: | C72 C78 D86 L13 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:0908&r=cta |