nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2015‒01‒09
thirteen papers chosen by
Guillem Roig
University of Melbourne

  1. Auctions vs. Negotiations:The Effects of Inefficient Renegotiation By Herweg, Fabian; Schmidt, Klaus M.
  2. Strategic Inaccuracy in Bargaining By Hidir, Sinem
  3. Endogenous Contractual Externalities By Ozdenoren, Emre; Yuan, Kathy
  4. Market Transparency, Adverse Selection, and Moral Hazard By Klein, Tobias J.; Lambertz, Christian; Stahl, Konrad
  5. The Beauty Contest and Short-Term Trading By Giovanni Cespa; Xavier Vives
  6. Transaction costs and the property rights approach to the theory of the firm By Muller, Daniel; Schmitz, Patrick W
  7. Human capital and optimal redistribution By Koeniger, Winfried; Prat, Julien
  8. Means-tested long term care and family transfers By CREMER, Helmuth; PESTIEAU, Pierre
  9. Quality differentiation and entry choice between online and offline markets By Yijuan Chen; Xiangting Hu; Sanxi Li
  10. Product Customization in the Spokes Model By Aoki, Reiko; Hillas, John; Kao, Tina
  11. In search of the transmission mechanism of fiscal policy in the Euro area By Fève, Patrick; Sahuc, Jean-Guillaume
  12. Overconfidence and career choice By Jonathan Schulz; Christian Thöni
  13. Media Power By Prat, Andrea

  1. By: Herweg, Fabian; Schmidt, Klaus M.
    Abstract: For the procurement of complex goods the early exchange of information is important to avoid costly renegotiation ex post. We show that this is achieved by bilateral negotiations but not by auctions. Negotiations strictly outperforms auctions if sellers are likely to have superior information about possible design improvements, if renegotiation is costly, and if the buyer's bargaining position is sufficiently strong. Moreover, we show that negotiations provide stronger incentives for sellers to investigate possible design improvements than auctions. This provides an explanation for the widespread use of negotiations as a procurement mechanism in private industry.
    Keywords: Auctions; Negotiations; Procurement; Renegotiation; Adaptation Costs; Loss Aversion; Behavioral Contract Theory.
    JEL: D03 D82 D83 H57
    Date: 2014–11–25
  2. By: Hidir, Sinem
    Abstract: This paper studies a buyer-seller game with pre-trade communication of private horizontal taste from the buyer followed by a take it or leave it offer by the seller. The amount of information transmitted improves the gains from trade, but also determines how this surplus will be shared between the two. Lack of commitment to a price creates a hold-up problem and a trade off between efficiency and rent extraction. In this setting, coarse information arises due to the concerns on the terms of the transaction. As the preferences get less important, information transmission becomes less precise. It is shown that in the buyer optimal equilibria of the static and dynamic games, the messages sent are just informative enough to ensure trade. In the dynamic game, the buyer is always better off sending infor- mative messages only at the first period, implying no gains from gradual revelation of information.
    Keywords: information; cheap-talk; bargaining; buyer-seller relation
    JEL: C72 D83
    Date: 2014–11
  3. By: Ozdenoren, Emre; Yuan, Kathy
    Abstract: We study ffort and risk-taking behaviour in an economy with a continuum of principal-agent pairs where each agent exerts costly hidden effort. When the industry productivity is uncertain, agents have motivations to match the industry average effort, which results in contractual externalities. Contractual externalities have welfare changing effects when the information friction is correlated and the industry risk is not revealed. This is because principals do not internalize the impact of their choice on other principals' endogenous industry risk exposure. Relative to the second best, if the expected productivity is high, risk-averse principals over-incentivise their own agents, triggering a rat race in effort exertion, resulting in over-investment in effort and excessive exposure to industry risks relative to the second best. The opposite occurs when the expected productivity is low.
    Keywords: boom-bust effort exertion; contractual externalities; relative and absolute performance contracts; risk taking
    JEL: D86 G01 G30
    Date: 2014–07
  4. By: Klein, Tobias J.; Lambertz, Christian; Stahl, Konrad
    Abstract: We study how seller exit and continuing sellers’ behavior on eBay are affected by an improvement in market transparency. The improvement was achieved by reducing strategic bias in buyer ratings. It led to a significant increase in buyer satisfaction with seller performance, but not to an increase in seller exit. When sellers had the choice between exiting—a reduction in adverse selection—and improving behavior—a reduction in moral hazard—, they preferred the latter because of lower cost. Increasing market transparency improved market outcomes.
    Keywords: Anonymous markets , adverse selection , moral hazard , reputation mechanisms , market transparency , market design
    JEL: D83 L15
    Date: 2014
  5. By: Giovanni Cespa (Cass Business School, CEPR, and CSEF); Xavier Vives (IESE Business School)
    Abstract: Short-termism need not breed informational price inefficiency even when generating Beauty Contests. We demonstrate this claim in a two-period market with persistent liquidity trading and risk-averse, privately informed, short-term investors and find that prices reect average expectations about fundamentals and liquidity trading. Informed investors engage in "retrospective" learning to reassess inferences (about fundamentals) made during the trading game's early stages. This behavior introduces strategic complementarities in the use of information and can yield two stable equilibria that can be ranked in terms of liquidity, volatility, and informational efficiency. We derive implications that explain market anomalies as well as empirical regularities.
    Keywords: price speculation, multiple equilibria, average expectations, public information, momentum and reversal
    JEL: G10 G12 G14
    Date: 2014–11–26
  6. By: Muller, Daniel; Schmitz, Patrick W
    Abstract: The standard property rights approach is focused on ex ante investment incentives, while there are no transaction costs that might restrain ex post negotiations. We explore the implications of such transaction costs. Prominent conclusions of the property rights theory may be overturned: A party may have stronger investment incentives when a non-investing party is the owner, and joint ownership can be the uniquely optimal ownership structure. Intuitively, an ownership structure that is unattractive in the standard model may now be desirable, because it implies large gains from trade, such that the parties are more inclined to incur the transaction costs.
    Keywords: incomplete contracts; joint ownership; property rights approach; transaction costs; vertical integration
    JEL: D23 D86 L24
    Date: 2014–10
  7. By: Koeniger, Winfried; Prat, Julien
    Abstract: We characterize optimal redistribution in a dynastic family model with human capital. We show how a government can improve the trade-off between equality and incentives by changing the amount of observable human capital. We provide an intuitive decomposition for the wedge between human-capital investment in the laissez faire and the social optimum. This wedge differs from the wedge for bequests because human capital carries risk: its returns depend on the non-diversifiable risk of children's ability. Thus, human capital investment is encouraged more than bequests in the social optimum if human capital is a bad hedge for consumption risk.
    Keywords: human capital,optimal taxation
    JEL: E24 H21 I22 J24
    Date: 2014
  8. By: CREMER, Helmuth (Toulouse School of Economics); PESTIEAU, Pierre (CREPP, Universté de Liège; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)
    Abstract: One of the pervasive problems with means-tested public long term care (LTC) programs is their inability to prevent individuals who could afford private long term services from taking advantage of public care. They often manage to elude the means-test net through “strategic impoverishment”. We show in a simple model how this problem comes about, how it affects welfare and how it can be mitigated.
    Keywords: long term care, means-testing, strategic impoverishment, opting out, public insurance, altruism
    JEL: H2 H5
    Date: 2014–06–11
  9. By: Yijuan Chen; Xiangting Hu; Sanxi Li
    Abstract: We study a model where an entrant chooses between online and offline markets to compete with an offline-market incumbent. When consumers buy a product from the online market, they cannot inspect the product's quality prior to purchase. Conventional wisdom and some literature suggest that this feature drives low-quality products to hide themselves in the online market. However, the literature on vertical product differentiation indicates that a firm may prefer to reveal its product quality in the offline market, because quality differentiation helps alleviate price competition. We show that under fairly general conditions the entrant will choose the offline market for not only the highest qualities but also the lowest ones, and choose the online market for intermediate qualities. While the average quality of the online good is lower than the incumbent's quality, the actual quality of the online good may be higher than that.
    JEL: L13
    Date: 2014–11
  10. By: Aoki, Reiko; Hillas, John; Kao, Tina
    Abstract: We use a spokes model to analyze ?ms?customization incentives when facing the choices of standard and niche products. Products at or near the end of the spokes are customized products, while products near the origin are more standardized products that cater to the taste of many consumers. Our results indicate that although monopolist always offers the standard product, if a ?m anticipates entry, it may choose to stake claim to a customized product. For low transportation costs, the early entrant chooses the standard product. But this equilibrium is characterized by aggressive pricing behavior.
    Keywords: product differentiation, product customization, entry, spatial oligopoly
    JEL: L11 L13
    Date: 2014–11
  11. By: Fève, Patrick; Sahuc, Jean-Guillaume
    Abstract: Hand-to-mouth consumers and Edgeworth complementarity between private consumption and public expenditures are two competing mechanisms that were put forward by the literature to investigate the effects of government spending. Using Bayesian prior and posterior analysis and several econometric experiments, we find that a model with Edgeworth complementarity is a better representation for the transmission mechanism of fiscal policy in the euro area. We also show that a small change in the degree of Edgeworth complementarity has a large impact on the estimated share of hand-to-mouth consumers. These findings are robust to a number of perturbations.
    Keywords: Fiscal multipliers, DSGE Models, Hand-to-Mouth, Edgeworth Complementarity, Euro Area, Bayesian Econometrics.
    JEL: C32 E32 E62
    Date: 2014–11–07
  12. By: Jonathan Schulz (University of Nottingham, School of Economics); Christian Thöni (University of Lausanne)
    Abstract: People self-assess their relative ability when making career choices. Thus, confidence in own abilities is likely an important factor for selection into various career paths. In a sample of 711 first-year students we examine whether there are systematic differences in confidence levels across fields of study. We find evidence for selection based on our experimental confidence measure: While Political Science students exhibit the highest confidence levels, students of Humanities range at the other end of the scale. This may have important implications for subsequent earnings and/or professions students select themselves in.
    Keywords: Overconfidence, selection, field of study, career choice
  13. By: Prat, Andrea
    Abstract: How much influence can news providers exert on the political process? This paper defines the power of a media organization as its ability to induce voters to make electoral decisions they would not make if reporting were unbiased. While existing media concentration measures are built by aggregating market shares across platforms, the new measure performs cross-platform aggregation at the level of individual voters on the basis of their attention shares. The paper derives a robust upper bound to media power over a range of assumptions on the beliefs and attention patterns of voters. Computing the value of the index for all major news sources in the United States from 2000 to 2012 results in four findings. First, it cannot be excluded that the three largest media conglomerates could individually swing the outcome of most presidential elections. Second, in all specifications the most powerful media organizations are broadcasters: the press and new media are always below. Third, relative media power is well approximated by a simple function of attention shares. Fourth, a calibrated version of the model indicates that media power is much lower than the upper bound but still substantial
    Keywords: media concentration; media plurality
    JEL: L82
    Date: 2014–08

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