nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2014‒07‒05
eleven papers chosen by
Simona Fabrizi
Massey University, Albany

  1. When Is Speech Silver and Silence Golden ?A Field Experiment on an Information Campaign By Olivier Body
  2. Banks as Secret Keepers By Tri Vi Dang; Gary Gorton; Bengt Holmström; Guillermo Ordonez
  3. Double moral hazard and the energy efficiency gap By Louis-Gaëtan Giraudet; Sébastien Houde
  4. Optimal organization of surrogacy contracts and underinvestment By Pramanick, Amrita; Banerjee, Swapnendu
  5. Relation entre l’opérateur de transport public à Bruxelles (STIB) et l’autorité organisatrice : entre asymétrie et coopération By Christophe GOETHALS
  6. "Mechanism Design with Bounded Depth of Reasoning and Small Modeling Mistakes" By Geoffroy de Clippel; Rene Saran; Roberto Serrano
  7. Optimal reinsurance under risk and uncertainty By Alejandro Balbás; Beatriz Balbás; Raquel Balbás; Antonio Heras
  8. Scoring auctions with non-quasilinear scoring rules By Krishnendu Ghosh Dastidar
  9. R&D Investment and Financial Frictions By Oscar M. Valencia
  10. Do Remittances Help Smooth Consumption During Health Shocks? Evidence From Jamaica By Diether Beuermann; Inder J. Ruprah; Ricardo Sierra
  11. Monitoring and efficiency wage versus profit sharing in a revolutionary context By Amal Hili

  1. By: Olivier Body
    Keywords: communication; information acquisition; field experiment; effort
    JEL: C93 D80
    Date: 2014–06
  2. By: Tri Vi Dang; Gary Gorton; Bengt Holmström; Guillermo Ordonez
    Abstract: Banks are optimally opaque institutions. They produce debt for use as a transaction medium (bank money), which requires that information about the backing assets – loans – not be revealed, so that bank money does not fluctuate in value, reducing the efficiency of trade. This need for opacity conflicts with the production of information about investment projects, needed for allocative efficiency. Intermediaries exist to hide such information, so banks select portfolios of information-insensitive assets. For the economy as a whole, firms endogenously separate into bank finance and capital market/stock market finance depending on the cost of producing information about their projects.
    JEL: D82 E44 G11 G14 G21
    Date: 2014–06
  3. By: Louis-Gaëtan Giraudet (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - AgroParisTech); Sébastien Houde (University of Maryland - University of Maryland)
    Abstract: We investigate how moral hazard problems can cause sub-optimal investment in energy efficiency, a phenomenon known as the energy efficiency gap. We argue that such problems are likely to be important for home energy retrofits, where both the seller and the buyer can take hidden actions. The retrofit contractor may cut on the quality of installation to save costs, while the homeowner may rebound, that is, increase her use of energy services when provided with higher energy efficiency. We first formalize the double moral hazard problem described above and examine how the resulting energy efficiency gap can be reduced through minimum quality standards or energy-savings insurance. We then calibrate the model to the U.S. home insulation market and quantify the deadweight loss. We find that for a large range of market environments, the welfare gains from undoing moral hazard are substantially larger than the costs of quality audits. They are also about one order of magnitude larger than those from internalizing carbon dioxide externalities associated with the use of natural gas for space heating. Moral hazard problems are consistent with homeowners investing with implied discount rates in the 15-35% range. Finally, we find that minimum quality standards outperform energy-savings insurance.
    Keywords: Energy efficiency gap, moral hazard, energy-savings insurance, minimum quality standard
    Date: 2014–06–21
  4. By: Pramanick, Amrita; Banerjee, Swapnendu
    Abstract: We develop a model of commercial gestational surrogacy in which a childless couple approaches a prospective surrogate, who is willing to gestate for the couple. The surrogate’s care is non-contractible. We show that if the surrogate doesn’t have any wealth, at the optimum, she is always found to put in sub-optimal effort. Put differently, the surrogate cannot be made a residual claimant and therefore eliciting first best care is never optimal. Therefore the paper, in a hidden action framework, formalizes this ‘inefficiency’ inherent in the Indian ‘rent-a-womb’ market.
    Keywords: Surrogate, intended-parents, surrogacy agency, monitoring, moral hazard
    JEL: D10
    Date: 2014–06–01
  5. By: Christophe GOETHALS (Centre de recherche et d’information socio-politiques (CRISP), Université Libre de Bruxelles (ULB), Centre Émile Bernheim (SBS-EM – ULB))
    Abstract: Since 1989 and the regionalization of public transports in Belgium, the Société des transports intercommunaux de Bruxelles (STIB), i.e. the public operator of urban transport in Brussels, has undergone many changes, both structural and organizational. Meanwhile, the company has managed to improve its financial health in accordance with the objectives set by the regulatory transport authority, the Region of Brussels-Capital. The analysis of the system of actors shows that, in a principal-agent relationship characterized by high information asymmetry, the convergence of interests between the supervisory authority and the public company is neither natural nor automatic: it is built. This construction takes place at several levels and materializes incrementally, particularly through the management contract. In this regulatory system, the process organizing the dialogue between the company and the authority produces the desired beneficial effects, more than the legal value of the contract does. The interdependence between the actions of the Region and those of the STIB implies practices that can be described as a partnership. Finally, the analysis shows that the contractualization is not inconsistent with an evolution of the roles of each actor
    Keywords: agency theory, asymmetric information, public enterprise, public policies, urban transport, regulatory reform, governance, system of actors, performance measurement.
    JEL: D82 G38 L32 D22 P11
    Date: 2014–06
  6. By: Geoffroy de Clippel; Rene Saran; Roberto Serrano
    Abstract: We consider mechanism design in contexts in which agents exhibit bounded depth of reasoning (level k) instead of rational expectations. We use simple direct mechanisms, in which agents report only first-order beliefs. While level 0 agents are assumed to be truth tellers, level k agents best-respond to their belief that other agents have at most k - 1 levels of reasoning. We find that incentive compatibility is necessary for implementation in this framework, while its strict version alone is sufficient. Adding continuity to both directions, the same results are obtained for continuous implementation with respect to small modeling mistakes. We present examples to illustrate the permissiveness of our findings in contrast to earlier related results under the assumption of rational expectations
    Keywords: mechanism design; bounded rationality; level k reasoning; small modeling mistakes; incentive compatibility; continuity
    Date: 2014
  7. By: Alejandro Balbás; Beatriz Balbás; Raquel Balbás; Antonio Heras
    Abstract: This paper deals with the optimal reinsurance problem if both insurer and reinsurer are facing risk and uncertainty, though the classical uncertainty free case is also included. The insurer and reinsurer degrees of uncertainty do not have to be identical. The decision variable is not the retained (or ceded) risk, but its sensitivity with respect to the total claims. Thus, if one imposes strictly positive lower bounds for this variable, the reinsurer moral hazard is totally eliminated. Three main contributions seem to be reached. Firstly, necessary and sufficient opti- mality conditions are given. Secondly, the optimal contract is often a bang-bang solution, i:e:, the sensitivity between the retained risk and the total claims saturates the imposed constraints. For some special cases the optimal contract might not be bang-bang, but there is always a bang-bang contract as close as desired to the optimal one. Thirdly, the optimal reinsurance problem is equivalent to other linear programming problem, despite the fact that risk, uncertainty, and many premium principles are not linear. This may be impor- tant because linear problems are easy to solve in practice, since there are very efficient algorithms.
    Keywords: Risk and Uncertainty, Moral Hazard, Optimal Reinsurance and Optimality Conditions, Bang-Bang Solution, The Optimal Reinsurance Linear Problem
    JEL: G22
    Date: 2014–06
  8. By: Krishnendu Ghosh Dastidar
    Abstract: In this paper we analyse scoring auctions with general non-quasilinear scoring rules. We assume that cost function of each firm is additively separable in quality and type. In sharp contrast to the recent results in the literature we show the following. (i) Equilibria in scoring auctions can be computed without any endogeneity problems and we get explicit solutions. (ii) We provide a complete characterisation of such equilibria and compare quality, price and expected scores across first-score and second-score auctions. (iii) We show that such properties and rankings depend on the curvature properties of the scoring rule and the distribution function of types.
    Date: 2014–06
  9. By: Oscar M. Valencia
    Abstract: R&D intensity for small firms is high and persistent over time. At the same time, small firms are often financially constrained. This paper proposes a theoretical model that explains the coexistence of these two stylized facts. It is shown that self-financed R&D investment can distort the effort allocated to different projects in a firm. In a dynamic environment, it is optimal for the firm to invest in R&D projects despite the borrowing constraints. In addition, this paper shows that beyond a certain threshold, effort substitution between R&D and production appears. When transfers from investor to entrepreneur are large enough, R&D intensity decreases with respect to financial resources. Conditional on survival, the more innovative and financially constrained firms are, faster they grow and exhibit higher volatility.
    Keywords: Moral Hazard, Endogenous Borrowing Constraints, Technological Change.
    JEL: O41 D86
    Date: 2014–06–26
  10. By: Diether Beuermann; Inder J. Ruprah; Ricardo Sierra
    Abstract: We identify whether remittances facilitate consumption smoothing during health shocks in Jamaica. In addition, we investigate whether remittances are subject to moral hazard by receivers, how the informal insurance provided by remittances interacts with formal health insurance, and whether there are differential effects by gender of the household head. We find that remittances offer complete insurance toward decreased consumption during health shocks and that moral hazard is weak. The role of remittances as a social insurance mechanism, however, is relevant only in the absence of private health insurance. No differential effects by gender of the household head are found.
    Keywords: Income, Consumption & Saving, Health Policy, Remittances, Remittances, Consumption, Health insurance, Social insurace
    Date: 2014–06
  11. By: Amal Hili (ISG-Sousse, EPEE-Universit´e d’Evry, Association MASE-ESSAI)
    Abstract: We propose to study the trade off between two incentive strategies (moni- toring and efficiency wage versus profit sharing), operated by one firm to induce more efforts among employees. We deal first with a normal context where shirkers bear the risk to be fired. We consider second a particular revolutionary context where employees, even when they go on infinite strikes, would not be dismissed as inspired by the tunisian revolution and more precisely by social movements and general strikes occurring among tunisian workers after revolution. We prove, in the first context, that the profit share to be distributed at equilibrium is pos- itive and depending on the monitoring strategy. In this first context, the two strategies are shown to be strategic complements for low values of risk aversion and strategic substitutes for high ones. We show in the second framework, the emergence of a particular case where the capital holder increases the profit share distributed to employees relative to the one in the first context. This equilibrium profit share is proven to be independent of the monitoring strategy.
    Keywords: monitoring, efficiency wage, profit sharing, strikes, risk aversion
    JEL: J41 J52
    Date: 2014

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