nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2013‒03‒30
five papers chosen by
Simona Fabrizi
Massey University, Albany

  1. Market-based incentives By Grochulski, Borys; Zhang, Yuzhe
  2. Relative Performance of Liability Rules: Experimental Evidence By Vera Angelova; Olivier Armantier; Giuseppe Attanasi; Yolande Hiriart
  3. Regulating a multiproduct and multitype monopolist By Szalay, Dezsö
  4. Coordination, Efficiency and Policy Discretion By Facundo Piguillem; Anderson Schneider
  5. Inefficient Hiring in Entry-Level Labor Markets By Amanda Pallais

  1. By: Grochulski, Borys; Zhang, Yuzhe
    Abstract: We study optimal incentives in a principal-agent problem in which the agent's outside option is determined endogenously in a competitive labor market. In equilibrium, strong performance increases the agent's market value. When this value becomes sufficiently high, the threat of the agent's quitting forces the principal to give the agent a raise. The prospect of obtaining this raise gives the agent an incentive to exert effort, which reduces the need for standard incentives, like bonuses. In fact, whenever the agent's option to quit is close to being ``in the money,'' the market-induced incentive completely eliminates the need for standard incentives.
    Keywords: Market-based incentive, Career Concerns, Endogenous outside option, Limited commitment, Private information, Wage contract
    JEL: D82 D86 J31 J33 M12 M52
    Date: 2013–03–25
  2. By: Vera Angelova (Technical University Berlin); Olivier Armantier (Federal Reserve Bank of New York); Giuseppe Attanasi (University of Strasbourg and Toulouse School of Economics); Yolande Hiriart (CRESE, Université de Franche-comté)
    Abstract: We compare the performance of liability rules for managing environmental disasters when third parties are harmed and cannot always be compensated. A firm can invest in safety to reduce the likelihood of accidents. The firm's investment is unobservable to authorities. The presence of externalities and asymmetric information call for public intervention in order to define rules aimed at increasing prevention. We determine the investments in safety under No Liability, Strict Liability and Negligence rules, and compare these to the first best. Additionally, we investigate how the (dis)ability of the firm to fully cover potential damage affects the firm's behavior. An experiment tests the theoretical predictions. In line with theory, Strict Liability and Negligence are equally effective; both perform better than No Liability; investment in safety is not sensitive to the ability of the firm to compensate potential victims. In contrast with theory, prevention rates absent liability are much higher, and liability is much less effective, than predicted.
    Keywords: Risk Regulation, Liability Rules, Incentives, Insolvency, Experiment
    JEL: D82 K13 K32 Q58
    Date: 2013–03
  3. By: Szalay, Dezsö
    Abstract: I study the optimal regulation of a firm producing two goods. The firm has private information about its cost of producing either of the goods. I explore the ways in which the optimal allocation differs from its one dimensional counterpart. With binding constraints in both dimensions, the allocation involves distortions for the most efficient producers and features overproduction for some less efficient types.
    JEL: D82 L21
    Date: 2013–03–15
  4. By: Facundo Piguillem (EIEF); Anderson Schneider (TRC)
    Abstract: Would citizens coordinate to punish a government when they observe suspicious behavior? This paper shows that under some circumstances such coordination is impossible. This fact has important implications for policy discretion. We study an environment with the following characteristics: 1) the aggregate productivity (fundamental) is stochastic, 2) only the government observes it and, 3) every agent privately receives a noisy signal about the fundamental. Item 1) implies that the best policy (tax on investment) with commitment is state contingent, while 2) and 3) make information incomplete. The main consequence of incomplete information is to make coordination among small anonymous agents harder. Since coordination is key to punishing the government when it deviates, independently of the accuracy of the signal, the set of sustainable payoffs is drastically reduced. Regardless of the size of the noise, state contingent policies cannot be an equilibrium. Moreover, the best equilibrium policy is independent of the fundamental, i.e., the optimal policy calls for strong rules rather than discretion. Finally, we show that the payoff of the best equilibrium without commitment is uniformly bounded away from the payoff of the equilibrium with commitment.
    Date: 2013
  5. By: Amanda Pallais
    Abstract: Hiring inexperienced workers generates information about their abilities. If this information is public, workers obtain its benefits. If workers cannot compensate firms for hiring them, firms will hire too few inexperienced workers. I determine the effects of hiring workers and revealing more information about their abilities through a field experiment in an online marketplace. I hired 952 randomly-selected workers, giving them either detailed or coarse public evaluations. Both hiring workers and providing more detailed evaluations substantially improved workers' subsequent employment outcomes. Under plausible assumptions, the experiment's market-level benefits exceeded its cost, suggesting that some experimental workers had been inefficiently unemployed.
    JEL: J01 J20 J60
    Date: 2013–03

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