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on Contract Theory and Applications |
| By: | Peter Eso (University of Oxford); Balazs Szentes (London School of Economics) |
| Abstract: | This paper considers a general, dynamic contracting problem with adverse selection and moral hazard, in which the agent's type stochastically evolves over time. The agent's final payoff depends on the entire history of private and public information, contractible decisions and the agent's hidden actions, and it is linear in the transfer between her and the principal. We transform the model into an equivalent one where the agent's subsequent information is independent in each period. Our main result is that for any fixed decision-action rule implemented by a mechanism, the maximal expected revenue that the principal can obtain is the same as if the principal could observe the agent's orthogonalized types after the initial period. In this sense, the dynamic nature of the relationship is irrelevant: the agent only receives information rents for her initial private information. We also show that any monotonic decision-action rule can be implemented in a Markov environment satisfying certain regularity conditions. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:605&r=cta |
| By: | James Malcomson |
| Abstract: | This paper explores the implications of specific training for relational contracts. A standard result for sustaining a relational contract is that the parties must jointly receive a surplus over what they can get by separating. This has been interpreted as employees with relational contracts having discretely higher pay and productivity than inherently equally productive, or near equally productive employees without relational contracts. Investment in specific training relaxes the incentive constraints on relational contracts, so the optimal level of investment can be higher for those with a relational contract than for those without, adding further to the productivity of those employed under a relational contract. But the additional cost of optimal investment precisely offsets the post-investment surplus for marginal employees in relational contracts, which removes the discontinuity in the joint payoff from a relational contract. An example shows that with optimal investment there may not even be a discontinuity in productivity between those employed with a relational contract and those employed without one because the incentive constraints on the former result in lower effort despite their higher training. |
| Keywords: | relational incentive contracts, investment, specific training, dual labour market |
| JEL: | C73 D82 D86 |
| Date: | 2014–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:732&r=cta |
| By: | Roberto Burguet |
| Abstract: | This paper investigates the design of optimal procurement mechanisms in the presence of corruption. After the sponsor and the contractor sign the contract, the latter may bribe the inspector to misrepresent quality. Thus, the mechanism affects whether bribery occurs. I show how to include bribery as an additional constraint in the optimal-control problem that the sponsor solves, and characterize the optimal contract. I discuss both the case of fixed bribes and bribes that depend on the size of the quality misrepresentation, and also uncertainty about the size of the bribe. In all cases, the optimal contract curtails quality not only for low efficiency contractors but also for the most efficient contractors. Implementation is also discussed. |
| Keywords: | bribery, quality, contract design |
| JEL: | D82 D73 H57 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:798&r=cta |
| By: | Bourguignon, Hélène; Gomes, Renato; Tirole, Jean |
| Abstract: | The proliferation of new payment methods on the Internet rekindles the old and unsettled debate about merchants’ incentive and ability to differentiate price according to payment choice. This paper develops an imperfect-information framework for the analysis of platform and social regulation of card surcharging and cash discounting. It makes three main contributions. First, it identifies the conditions under which concerns about missed sales induce merchants to perceive that they must take the card. Second, it derives a set of predictions about cash discounts, card surcharges and platform fees that match, and shed light on existing evidence. Finally, it shows that the optimal regulation of surcharging is related to public policy toward merchant fees and substantially differs from current practice. |
| Keywords: | card surcharges; cash discounts; hold-ups in two-sided markets; missed sales; payment cards |
| JEL: | D83 L10 L41 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10171&r=cta |
| By: | Cabral, Luís M B |
| Abstract: | I show that exclusive, staggered supply contracts can decrease industry competition when there are economies of scale: buyers pay a higher price to the incumbent seller and the expected value received by an entrant seller is lower when contracts are staggered. Moreover, under staggered contracts there may exist equilibria where an inefficient firm forecloses a more efficient one. Given that contracts are staggered, contract length further increases market power; however, increasing contract length may also eliminate the inefficient foreclosure equilibrium. Finally, I show that, allowing firms to choose contract structure endogenously, the resulting equilibrium path features staggered contracts. |
| Keywords: | dynamic competition; exclusion; staggered contracts |
| JEL: | L12 L41 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10095&r=cta |
| By: | Antonio Cabrales; Piero Gottardi; Fernando Vega-Redondo |
| Abstract: | We investigate the trade-off, arising in financial networks, between higher risksharing and greater exposure to contagion when the connectivity increases. We find that with shock distributions displaying "fat" tails, extreme segmentation into small components is optimal, while minimal segmentation and high density of connections are optimal with distributions exhibiting "thin" tails. For less regular distributions, intermediate degrees of segmentation and sparser connections are optimal. If firms are heterogeneous, optimality requires perfect assortativity in their linkages. In general, however, a conflict arises between optimality and individual incentives to establish linkages, due to a "size externality" not internalized by firms. |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2014-18&r=cta |
| By: | Banerjee, Abhijit; Chandrasekhar, Arun G; Duflo, Esther; Jackson, Matthew O. |
| Abstract: | Can we identify the members of a community who are best- placed to diffuse information simply by asking a random sample of in- dividuals? We show that boundedly-rational individuals can, simply by tracking sources of gossip, identify those who are most central in a network according to "diffusion centrality", which nests other standard centrality measures. Testing this prediction with data from 35 Indian villages, we find that respondents accurately nominate those who are diffusion central (not just those with many friends). Moreover, these nominees are more central in the network than traditional village leaders and geographically central individuals. |
| Keywords: | centrality; diffusion; gossip; influence; networks; social learning |
| JEL: | D13 D85 L14 O12 Z13 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10120&r=cta |
| By: | Spiegel, Yossi; Stahl, Konrad |
| Abstract: | We consider the interaction between an incumbent firm and a potential entrant, and examine how this interaction is affected by demand fluctuations. Our model gives rise to procyclical entry, prices, and price-cost margins, although the average price in the market can be countercyclical if the entrant is the first mover, and capacity utilization can be either pro- or countercyclical if the incumbent is the first mover. Moreover, our results show that entry deterrence by the incumbent firm can either amplify or dampen the effect of demand fluctuations on prices, price-cost margins, and capacity utilization. |
| Keywords: | business cycle; entry; entry deterrence; price competition |
| JEL: | D43 L41 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10009&r=cta |
| By: | Guner, Nezih; Kulikova, Yuliy; Llull, Joan |
| Abstract: | We use the Panel Study of Income Dynamics (PSID) and the Medical Expenditure Panel Survey (MEPS) to study the relationship between marriage and health for working-age (20 to 64) individuals. In both data sets married agents are healthier than unmarried ones, and the health gap between married and unmarried agents widens by age. After controlling for observables, a gap of about 12 percentage points in self-reported health persists for ages 55-59. We estimate the marriage health gap non-parametrically as a function of age. If we allow for unobserved heterogeneity in innate permanent health, potentially correlated with timing and likelihood of marriage, we find that the effect of marriage on health disappears at younger (20-39) ages, while about 6 percentage points difference between married and unmarried individuals, about half of the total gap, remains at older (55-59) ages. These results indicate that association between marriage and health is mainly driven by selection into marriage at younger ages, while there might be a protective effect of marriage at older ages. We analyze how selection and protective effects of marriage show up in the data. |
| Keywords: | health; marriage; selection |
| JEL: | I10 I12 J12 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10245&r=cta |