nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2011‒06‒18
ten papers chosen by
Simona Fabrizi
Massey University, Albany

  1. International Environmental Agreements: Incentive Contracts with Multilateral Externalities By Carsten Helm; Franz Wirl
  2. Competing Mechanism Games of Moral Hazard: Communication and Robustness By Andrea Attar; Eloisa Campioni; Gwenael Piaser; Uday Rajan
  3. Communication and Reputation in Procurement Auctions – Some Empirical Evidence By Timo Heinrich
  4. Entry deterrrence via renegotiation-proof non-exclusive contracts By Aggey Semenov; Julian Wright
  5. Optimal Unemployment Insurance for Older Workers By Hairault, Jean-Olivier; Langot, François; Ménard, Sébastien; Sopraseuth, Thepthida
  6. Banking Instability and Deposit Insurance: The Role of Moral Hazard By Ngalawa, Harold; Tchana Tchana, Fulbert; Viegi, Nicola
  7. Adverse selection and moral hazard among the poor: evidence from a randomized experiment By Spenkch, Jörg L.
  8. Tenure Insecurity, Adverse Selection, and Liquidity in Rural Land Markets By Derek Stacey
  9. Career concerns : a human capital perspective By Camargos, Braz Ministério de; Pastorino, Elena
  10. Public provision of private goods, self-selection and income tax avoidance By Blomquist, Sören; Christiansen, Vidar; Micheletto, Luca

  1. By: Carsten Helm (Department of Economics, University of Oldenburg); Franz Wirl (University of Vienna, Center of Business Studies)
    Abstract: We consider how one party can induce another party to join an inter- national emission compact given private information. Due to multilateral externalities the principal uses her own emissions besides subsidies to in- centivize the agent. This leads to a number of non-standard features: Optimal contracts can include a boundary part, which is not a copy of the no contract outcome. Compared to this, a contract can increase emis- sions of the principal for ine¢ cient types, and reduce his payo¤ for e¢ cient types. Subsidies can be constant or even decreasing and turn negative, i.e., the agent reduces emissions and pays the principal.
    Keywords: private information, multilateral externalities, mecha- nism design, restricted contracts, environmental agreements
    JEL: D82 Q54 H87
    Date: 2011–06
  2. By: Andrea Attar (Faculty of Economics, University of Rome "Tor Vergata"); Eloisa Campioni (Faculty of Economics, University of Rome "Tor Vergata"); Gwenael Piaser (IPAG Business School, Paris;); Uday Rajan (Ross School of Business, University of Michigan;)
    Abstract: We consider multiple-principal multiple-agent models of moral hazard: principals compete through mechanisms in the presence of agents who take unobservable actions. In this context, we provide a rationale for restricting principals to make use of simple mechanisms, which correspond to direct mechanisms in the standard framework of Myerson (1982). Our results complement those of Han (2007) who analyzes a complete information setting where agents’ actions are fully contractible.
    Keywords: Moral hazard, multiple-principal multiple-agent, simple mechanisms
    JEL: D82 D86
    Date: 2011–06–10
  3. By: Timo Heinrich
    Abstract: This paper studies the role of communication and reputation in market interactions using data from online procurement auctions. Not only positive reputation ratings but also engaging in communication increases a bidder’s probability of winning the auction. Messages are primarily used to reduce the asymmetric information associated with transactions.
    Keywords: Communication; procurement auctions; reputation
    JEL: D44 D83 L14
    Date: 2011–04
  4. By: Aggey Semenov (Department of Economics, University of Ottawa, Ottawa, ON); Julian Wright (Department of Economics, National University of Singapour)
    Abstract: We establish the entry-deterring role of vertical contracts in a setting that does not rely on asymmetric information, the exclusivity of the incumbent’s contracts, limits on distribution channels, or restrictions on the ability to renegotiate contracts in case of entry. The optimal contract we describe is a three-part quantity discounting contract that involves the payment of an allowance to the downstream firm and a marginal wholesale price below the incumbent’s marginal cost for sufficiently large quantities
    Keywords: entry, vertical contracts, exclusivity, renegotiation
    JEL: D21 L42
    Date: 2011
  5. By: Hairault, Jean-Olivier; Langot, François; Ménard, Sébastien; Sopraseuth, Thepthida
    Abstract: This paper shows that optimal unemployment insurance contracts are age-dependent. Older workers have only a few years left on the labor market prior to retirement. This short horizon implies a more decreasing replacement ratio. However, there is a sufficiently short distance to retirement for which flat unemployment benefits can be the optimal contract. It is the result of the inability to reconcile both incentives and insurance for the soon-to-be-retired unemployed workers. We show that the unemployment benefit agency could take advantage of the retirement period to tax pensions in order to optimize the trade-off between insurance and incentives at the end of working life.
    Keywords: Unemployment insurance; Retirement; Recursive contracts; Moral Hazard
    JEL: C61 J64 J65
    Date: 2011–06
  6. By: Ngalawa, Harold; Tchana Tchana, Fulbert; Viegi, Nicola
    Abstract: This paper aims at empirically investigating the role of moral hazard in the e¢ ctivity of deposit insurance in achieving banking stability. If the negative e¤ect of deposit insurance on banking stability is through moral hazard, then deposit insurance will be associated with banking insolvency and credit crunch more than with bank runs. To test this hypothesis, we compute measures of these two types of banking instability. We …nd that deposit insurance per se has no signi…cant e¤ect either on bank insolvency and credit crunch or on bank runs. However, when the deposit insurance is coupled with an increase in credit to private sector, it has a positive and signi…cant e¤ect on bank insolvency and credit crunch but not on bank runs.
    Keywords: Banking Crises; Deposit Insurance; Moral hazard
    JEL: E44 G21
    Date: 2011–06–02
  7. By: Spenkch, Jörg L.
    Abstract: Not only does economic theory predict high-risk individuals to be more likely to purchase insurance, but insurance coverage is also thought to crowd out precautionary activities. In spite of stark theoretical predictions, there is conflicting empirical evidence on adverse selection, and evidence on ex ante moral hazard is very scarce. Using data from the Seguro Popular Experiment in Mexico, this paper documents patterns of adverse selection into health insurance as well as the existence of non-negligible ex ante moral hazard. More specifically, the findings indicate that (i) agents in poor self-assessed health prior to the intervention have, all else equal, a higher propensity to take up insurance; and (ii) insurance coverage reduces the demand for self-protection in the form of preventive care. Curiously, however, individuals do not sort based on objective measures of their health.
    Keywords: health insurance; adverse selection; moral hazard
    JEL: I11 D82 I10
    Date: 2011–05
  8. By: Derek Stacey (Queen's University)
    Abstract: A theory of land market activity is developed for settings where there is uncertainty and private information about the security of land tenure. Land sellers match with buyers in a competitive search environment, and an illiquid land market emerges as a screening mechanism. As a consequence, adverse selection and an insecure system of property rights stifle land market transactions. The implications of the theory are tested using household level data from Indonesia. As predicted, formally titled land is more liquid than untitled land in the sense that ownership rights are more readily transferable. Additional implications of the theory are verified empirically by constructing a proxy variable for land tenure security and studying the differences between markets for unregistered land across Indonesian provinces. Regional land market activity is appropriately linked to the distribution of the proxy variable.
    Keywords: Competitive Search, Land Markets, Tenure Security, Liquidity
    JEL: D83 Q15 D23 R23
    Date: 2011–04
  9. By: Camargos, Braz Ministério de; Pastorino, Elena
    Abstract: We introduce human capital accumulation, in the form of learning{by{doing, in alife cycle model of career concerns and analyze how human capital acquisition a ectsimplicit incentives for performance. We show that standard results from the careerconcerns literature can be reversed in the presence of human capital accumulation.Namely, implicit incentives need not decrease over time and may decrease with thedegree of uncertainty about an individual's talent. Furthermore, increasing the pre-cision of output measurement can weaken rather than strengthen implicit incentives.Overall, our results contribute to shed new light on the ability of markets to disciplinemoral hazard in the absence of explicit contracts linking pay to performance.
    Date: 2011–06–02
  10. By: Blomquist, Sören (Uppsala Center for Fiscal Studies); Christiansen, Vidar (Department of Economics, University of Oslo); Micheletto, Luca (Uppsala Center for Fiscal Studies)
    Abstract: Several contributions in the optimal taxation literature have emphasized that, when individuals’ preferences are not separable between leisure and other goods, it is desirable to supplement a nonlinear income tax with public provision of private goods. Moreover, it has also been shown that the choice between a topping-up and an opting-out scheme depends on whether the publicly provided good is a complement or substitute with leisure, with opting-out (topping-up) being the preferred scheme for goods which are substitutes (complements)for labor. In this paper, using the self-selection approach to tax analysis, we revisit these results in the presence of tax avoidance, and investigate how public provision interacts with the agents’incentives to engage in tax avoidance. Three results are obtained. First, we show that tax dodging opportunities imply that non-separability between labor and other goods is neither a necessary nor a sufficient condition to make public provision of private goods a welfare-enhancing policy instrument. Second, we show how tax dodging opportunities limit the scope for using topping-up provision schemes as a redistributive device. Finally, we show that, for most of the public provision schemes previously analyzed in the literature, being a welfare-enhancing policy instrument goes hand in hand with weakening the agents’incentives to shelter income from the tax authority. However, we also point out an important exception to this pattern.
    Keywords: optimal nonlinear income tax; public provision of private goods; tax avoidance
    JEL: H21 H26 H42
    Date: 2011–06–01

This nep-cta issue is ©2011 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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.