nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2015‒01‒26
eleven papers chosen by
Guillem Roig
University of Melbourne

  1. Optimal deterrence of illegal behavior under imperfect corporate governance By Argenton, C.; van Damme, E.E.C.
  2. The Social Value of Private Information By Thomas Mertens; Tarek Hassan
  3. Resale in Second-Price Auctions with Costly Participation By Gorkem Celik; Okan Yilankaya
  4. To know or not to know: Endogenous market structure when information can be strategically neglected By R. Cellini; L. Lambertini; G. I. P. Ottaviano
  5. Understanding the role of debt in the financial system By Bengt Holmstrom
  6. Regulatory Independence – It’s not Just about Institutionss By Gordon Menzies
  7. Exclusive Contracts with Complementary Inputs By Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
  8. The Value of Public Information in Common-Value Tullock Contests By Ezra Einy; Diego Moreno; Benyamin Shitovitz
  9. Relationship-Speci…c Investments and Intellectual Property Rights Enforcement with Heterogeneous Suppliers By A. Naghavi; S. Peng; Y. Tsai
  10. Buyer Power and Functional Competition for Innovation By Inderst, Roman; Jakubovic, Zlata; Jovanovic, Dragan
  11. Intellectual property rights hinder sequential innovation: experimental evidence By Brueggemann, J.; Crosetto, P.; Meub, L.; Bizer, K.

  1. By: Argenton, C. (Tilburg University, Center For Economic Research); van Damme, E.E.C. (Tilburg University, Center For Economic Research)
    Abstract: We study the optimal design of liability schemes (at the corporate or individual level) when the objective is to deter socially harmful corporate behavior without discouraging productivity enhancements. We assume that firms face agency problems between shareholders and managers (moral hazard) and that unlimited sanctions on individuals are not available. We show that pure corporate liability rules can induce the first-best outcome only if firms can condition compensation on detection and the enforcement system is good enough. In other circumstances, unless individual sanctions can be very high, optimal mechanisms typically impose both corporate and individual liability.
    Keywords: illegal behavior; deterrence; agency problems; moral hazard; corporate liability; corporate crime
    JEL: D82 K21 L49
    Date: 2014
  2. By: Thomas Mertens (New York University); Tarek Hassan (The University of Chicago)
    Date: 2014
  3. By: Gorkem Celik (Department of Economics, ESSEC Business School and THEMA Research Center, Cergy-Pontoise, France); Okan Yilankaya (Department of Economics, Koc University)
    Abstract: We investigate efficiency properties of sealed-bid second-price auctions with costly participation and resale. Each bidder chooses to participate in the auction if her valuation is higher than her optimally chosen participation cutoff. If resale is not allowed and the bidder valuations are drawn from a strictly convex distribution function, the symmetric equilibrium (where all bidders use the same cutoff) is less efficient than a class of two-cutoff asymmetric equilibria. Existence of these equilibria without resale is sufficient for existence of similarly constructed two-cutoff equilibria with resale. Moreover, these equilibria with resale are more asymmetric and (under a sufficient condition) more efficient than the corresponding equilibria without resale.
    Keywords: Second-price auctions; resale; participation cost; endogenous entry; endogenous valuations
    JEL: C72 D44 D82
    Date: 2015–01
  4. By: R. Cellini; L. Lambertini; G. I. P. Ottaviano
    Abstract: We study the firms’ choice of whether or not to consider pieces of information concerning their interdependence. In particular, any firm can strategically choose to consider or not the fact that industry output is affected by its own production choice. If this piece of information is considered, the firm behaves as an aligopolist; if not, firm behaves in a monopolistically competitive way. Thus, the market regime is endogenously determined. We show that different outcomes can emerge, depending on the number of firms, the degree of product substitutability and the cost structure.
    JEL: D43 L13
    Date: 2015–01
  5. By: Bengt Holmstrom
    Abstract: Money markets are fundamentally different from stock markets. Stock markets are about price discovery for the purpose of allocating risk efficiently. Money markets are about obviating the need for price discovery using over-collateralised debt to reduce the cost of lending. Yet, attempts to reform credit markets in the wake of the recent financial crisis often draw on insights grounded in our understanding of stock markets. This can be very misleading. The paper presents a perspective on the logic of credit markets and the structure of debt contracts that highlights the information insensitivity of debt. This perspective explains among other things why opacity often enhances liquidity in credit markets and therefore why all financial panics involve debt. These basic insights into the nature of debt and credit markets are simple but important for thinking about policies on transparency, on capital buffers and other regulatory issues concerning banking and money markets.
    Keywords: financial crisis, liquidity, money markets, shadow banking, debt, information sensitivity, pawn shops, bailouts, banking regulation
    Date: 2015–01
  6. By: Gordon Menzies (Economics Discipline Group, University of Technology, Sydney)
    Abstract: Financial regulators perform inter alia a quality control function, as they search for recession-generating flaws in the financial system. Some groupings of regulations operate more or less independently to other groupings, as is the case when different agents – not necessarily different institutions – examining the same regulatory issues or monitor the same behaviours independently. We refer to these clusters as Independent Dimensions of Regulation (IDRs). They may appear inefficient if the same issue is explored repeatedly. However, statistical independence in this context can rapidly reduce the probability of crises. If quality control regulations are dependent, policymakers should make them more independent.
    Keywords: banking; regulation; monitoring; financial crises
    JEL: G01 G18 G28
    Date: 2014–12–01
  7. By: Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
    Abstract: This study constructs a model of anticompetitive exclusive contracts in the presence of complementary inputs. A downstream firm transforms multiple complementary inputs into final products. When complementary input suppliers have market power, upstream competition within a given input market benefits not only the downstream firm (by lowering the input price) but also complementary input suppliers (by raising complementary input prices). The downstream firm is thus unable to earn higher profits even when socially efficient entry is allowed. Hence, the inefficient incumbent supplier can deter socially efficient entry by using exclusive contracts even in the absence of economies of scale and downstream competition. These results have important implications for antitrust agencies, showing the importance of considering the existence of complementary inputs when examining cases of potential anticompetitive exclusive dealing.
    Date: 2015–01
  8. By: Ezra Einy (BGU); Diego Moreno (Departamento de Economia, Universidad Carlos III de Madrid, Spain); Benyamin Shitovitz (Department of Economics, University of Haifa, Israel)
    Keywords: Tullock Contests, Common-Values, Value of Public Information
    JEL: C72 D44 D82
    Date: 2014
  9. By: A. Naghavi; S. Peng; Y. Tsai
    Abstract: This paper examines the impact of intellectual property rights (IPR) enforcement on multinationals' choice of input suppliers and industry profi…ts in a host economy. The framework consists of suppliers with heterogeneous capabilities who must engage in a relation-specifi…c investment to customize intermediate inputs upon a transfer payment by fi…nal producers. An outsourcing contract with better technologically-endowed suppliers requires a lower transfer and generates a higher surplus. Stronger IPR enforcement leads fi…rms to self-select into better quality suppliers on average by reducing their outside option. Weak legal institutions instead make it possible for a larger range of suppliers, including the less capable ones, to form partnerships by granting them a larger outside option. A better IPR environment is more likely to harm lagging countries where the technology distribution is characterized by less capable suppliers.
    JEL: O34 L24 F21 F23 O32 L22 D23
    Date: 2015–01
  10. By: Inderst, Roman; Jakubovic, Zlata; Jovanovic, Dragan
    Abstract: Our analysis starts from the observation that with progressive consolidation in retailing and the spread of private labels, retailers increasingly take over functions in the vertical chain. Focusing on innovation, we isolate various reasons for why when a large retailer grows in size, this can lead to an inefficient shift of innovation activity away from manufacturers and to the large retailer. One rationale for this is the retailer's control of access to consumers, which gives rise to a rent-appropriation motive for innovation, next to a hold-up problem. With retail competition, through crowding out the manufacturer's innovative activity, a large retailer obtains a competitive advantage vis-à-vis smaller retailers. We further analyze when inefficiencies are aggravated in case a large retailer's presence threatens the manufacturer with imitation of his innovations.
    Keywords: Buyer Power, Innovation, Functional Competition, Imitation
    JEL: D43 L11 L13 L42
    Date: 2015–01
  11. By: Brueggemann, J.; Crosetto, P.; Meub, L.; Bizer, K.
    Abstract: In this paper we contribute to the discussion on whether intellectual property rights foster or hinder innovation by means of a laboratory experiment. We introduce a novel Scrabble-like creativity task that captures most essentialities of a sequential innovation process. We use this task to investigate the effects of intellectual property allowing subjects to assign license fees to their innovations. We find intellectual property to have an adverse effect on welfare as innovations become less frequent and less sophisticated. Communication among innovators is not able to prevent this detrimental effect. Introducing intellectual property results in more basic innovations and subjects fail to exploit the most valuable sequential innovation paths. Subjects act more self-reliant and non-optimally in order to avoid paying license fees. Our results suggest that granting intellectual property rights hinders innovations, especially for sectors characterized by a strong sequentiality in innovation processes.
    JEL: C91 D89 K39
    Date: 2015

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