nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2010‒11‒13
ten papers chosen by
Simona Fabrizi
Massey University, Albany

  1. A SIMPLE MODEL OF NEPOTISM By Michela Ponzo; Vincenzo Scoppa
  2. A Re-examination of Credit Rationing in the Stiglitz and Weiss Model By Su, Xunhua
  3. Government and the provision of public goods: from equilibrium models to mechanism design By Monique Florenzano
  4. Do Salaries Improve Worker Performance? By Alex Bryson; Babatunde Buraimo; Rob Simmons
  5. Information Asymmetries and Regulatory Decision Costs: An Analysis of U.S. Electric Utility Rate Changes 1980–2000 By Fremeth, Adam R.; Holburn, Guy L. F.
  6. Transaction costs in agri-environmental schemes: the principal-agent-point of view By Weber, Anja Michaela; Nuppenau, Ernst-August
  7. A Model of Delegated Project Choice With Application to Merger Policy.. By Armstrong, Mark; Vickers, John
  8. Dynamic incentives in organizations: Success and inertia By Ruckes, Martin; Rønde, Thomas
  9. Smooth multibidding mechanisms By David Pérez-Castrillo; Nicolas Quérou
  10. Private benefits and market competition By Jacques Thépot

  1. By: Michela Ponzo; Vincenzo Scoppa (Dipartimento di Economia e Statistica, Università della Calabria)
    Abstract: This paper analyses theoretically favouritism in recruitment decisions. We study the investments in connections by applicants for jobs which pay a wage rent and the behaviour of public or private managers intending to favour the recruitment of connected agents in place of more competent candidates. Key elements in determining favouritism are the delegation of recruitment decisions and unverifiable information regarding the skills of job applicants. We show in an agency framework that if the manager is “corruptible”, both low and high ability workers invest in connections and that nepotism is more widespread in jobs paying high wage-rents; in organisations in which “low-powered incentives” are used for managers; when firm performance is slightly sensitive to abilities; when it is easy to make hidden payments and the intensity of family ties is strong; when the uncertainty of connection process is low.
    Keywords: Recruitment policies, Favouritism, Nepotism, Connections, Incentives
    JEL: M51 D73 J24 J71 J31
    Date: 2010–10
  2. By: Su, Xunhua (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: To explain the widely observed phenomenon of credit rationing, Stiglitz and Weiss (1981) propose a theory of random rationing under imperfect information. With a simple model plausibly expanding the Stiglitz and Weiss setting, we argue that, random rationing occurs only in some extreme cases and hence is not likely to be a prevalent phenomenon. We start by illustrating that the Stiglitz and Weiss (1981) model and hence random rationing are quite sensitive to the assumption of the ranking of projects. Given that the ranking is according to the Mean-preserving Spread, there is adverse selection but no moral hazard. In the absence of moral hazard, random rationing is almost impossible to occur. Then by presuming the coexistence of adverse selection and moral hazard, we derive two required conditions for the occurrence of random rationing. First, random rationing occurs only if collateral has an overall deadweight cost other than the negative adverse selection effect. As collateral is a widely observed debt feature in practice, such an overall deadweight cost should not be the case for the majority of borrowers. Second, the occurrence of random rationing entails that the potential negative effects of the loan rate, collateral, loan size and any restrictive debt covenant simultaneously overweigh their positive effects exactly at the current contracting level. In this case, the zero-profit curve of the lender degenerates to a single point and borrowers face a take-it-or-leave-it offer. We conjecture that such a required condition leaves little space for the significance of random rationing.
    Keywords: Credit Rationing; Stiglitz and Weiss Model
    JEL: G00
    Date: 2010–11–05
  3. By: Monique Florenzano (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: Focussing on their analysis of the optimal public goods provision problems, this paper follows the parallel development of equilibrium models and mechanism design after the accommodation of Samuelson's definition of collective goods to the general equilibrium framework. Both paradigms lead to the negative conclusion of the impossibility of a fully decentralized optimal public goods provision throught market or market-like institutions.
    Keywords: general equilibrium, Lindahl-Foley equilibrium, Wicksell-Foley public competitive equilibrium, private provision equilibrium, mechanism design, free-rider problem, incentive compatibility, principal-agent models
    Date: 2010–10
  4. By: Alex Bryson; Babatunde Buraimo; Rob Simmons
    Abstract: We establish the effects of salaries on worker performance by exploiting a natural experimentin which some workers in a particular occupation (football referees) switch from short-termcontracts to salaried contracts. Worker performance improves among those who move ontosalaried contracts relative to those who do not. The finding is robust to the introduction ofworker fixed effects indicating that it is not driven by better workers being awarded salarycontracts. Nor is it sensitive to workers sorting into or out of the profession. Improvedperformance could arise from the additional effort workers exert due to career concerns, thehigher income associated with career contracts (an efficiency wage effect) or improvementsin worker quality arising from off-the-job training which accompanies the salaried contracts.
    Keywords: incentives, salaries, productivity, sports
    JEL: J33 M52
    Date: 2010–10
  5. By: Fremeth, Adam R.; Holburn, Guy L. F.
    Abstract: We argue that information asymmetries between regulators and firms increase the administrative decision costs of initiating new policies due to the costs of satisfying evidentiary or ‘‘burden of proof’’ requirements. We further contend that regulators with better information about regulated firms—that is, with lower information asymmetries—have lower decision costs, thereby facilitating regulator policy making. To empirically test our predictions, we examine the relationship between regulatory informational environments and changes to regulated rates for all investor-owned electric utilities from 1980 to 2000. We exploit several natural sources of variation in the informational environments of US state utility regulators. These stem from the prior experiences and administrative resources of regulators, observable policy decisions of other regulatory agencies for a given utility, and differences in procedural regulations pertaining to rate increases and decreases. Our results suggest that as regulators acquire more information about utility operations, including from experience in office, they are more likely to enact rate decreases and less likely to implement rate increases.
    Date: 2010–02
  6. By: Weber, Anja Michaela; Nuppenau, Ernst-August
    Abstract: Agri-environmental schemes provide payments for farmers in return for environmental services. Their implementation induces transaction costs for administration and farmers. Although transaction costs became subject of research in recent years, little attention has been paid to activities which create them. This paper uses insights from Principal-Agent-Theory to show, how information gaps between contracting partners result in tradeoffs inducing activities conducted at implementation level. A Grassland Extensification Scheme, provided in Hesse, Germany, serves as a case-study. The paper shows that attempts and incentives to overcome informational gaps are different for administration and farmer. Further, attempts to reduce transaction costs of own activities may have spillover effects on the transaction costs of the contracting partner and along the transaction process. Those effects should be taken into account in discussions on scheme evaluation and development.
    Keywords: agri-environmental schemes, transaction costs, principal-agent-theory, hesse, Germany, Community/Rural/Urban Development, Q18, Q23,
    Date: 2010–08
  7. By: Armstrong, Mark; Vickers, John
    Abstract: We present a model in which a principal delegates the choice of project to an agent with different preferences. A project's characteristics are verifiable once presented to the principal, but the principal does not know how many projects are available to the agent. The principal chooses the set of projects which the agent can implement. Three frameworks are considered: (i) a static setting in which the set of available projects is exogenous to the agent but uncertain; (ii) a dynamic setting in which by expending effort the agent can affect the number of projects, and (iii) a dynamic setting in which the agent must wait for projects to materialize. The model is applied to the choice of welfare standard for merger policy.
    Date: 2010
  8. By: Ruckes, Martin; Rønde, Thomas
    Abstract: We present a dynamic model in which an employee of a firm searches for business projects in a changing environment. It is costly to induce the employee who found a successful project in the past period to search for a new project. Past success can therefore result in profitreducing corporate inertia. Still, when the firm chooses to counteract the reluctance to search by increasing the power of the incentives, it stimulates initial search efforts and results in higher profits. Corporate restructuring and increasing the employee's authority over time are means to alleviate inertia but may undermine initial search incentives. --
    Keywords: incentives in organizations,inertia,innovation,restructuring
    JEL: L2 M12 M54 O31 O32
    Date: 2010
  9. By: David Pérez-Castrillo; Nicolas Quérou
    Abstract: We propose a smooth multibidding mechanism for environments where a group of agents have to choose one out of several projects (possibly with the help of a social planner). Our proposal is related to the multibidding mechanism (Pérez-Castrillo and Wettstein, 2002) but it is "smoother" in the sense that small variations in an agent's bids do not lead to dramatic changes in the probability of selecting a project. This mechanism is shown to possess several interesting properties. Unlike in the study by Pérez Castrillo and Wettstein (2002), the equilibrium outcome is unique. Second, it ensures an equal sharing of the surplus that it induces. Finally, it enables reaching an outcome as close to effciency as is desired.
    Keywords: mechanism design, NIMBY
    JEL: D78 D72
    Date: 2010–11–05
  10. By: Jacques Thépot (LaRGE Research Center, Université de Strasbourg)
    Abstract: This paper deals with corporate governance issues and competition policy. The impact of private benefits extraction on the values of oligopolistic firms is analyzed. Private benefits are assumed to generate costs which create price distortion on the product market. For a wide range of industry concentrations, we prove that this may affect the profit (i.e. the value) of the firms in a positive sense since the intensity of rivalry is reduced by the price distortion. Antitrust implications are discussed. In oligopoly, private benefits extraction may enhance the profits while still generating a welfare loss: this suggests that corporate governance cannot be divorced from competiton policy in industries where managerial opportunism generates operating costs.
    Date: 2010

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