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on Contract Theory and Applications |
| By: | Eduardo Zilberman (Department of Economics PUC-Rio); Pedro Hemsley (Department of Economics UERJ) |
| Abstract: | In an endowment economy in which agents negotiate long-term contracts with a financial intermediary, we study the implication of the interaction between incentive compatibility and participation constraints for risk sharing. In particular, we assume that after a default episode, agents consume their endowment and remain in autarky forever. Theoretically, we show that in autarky, the principal cannot spread continuation values to provide incentives except for the agent that draws the highest realization of the endowment. If the probability of such event is small enough then autarky is a persistent state. Numerically, we explore this implication to argue that the optimal contract prevents agents from reaching autarky when the probability of drawing the highest realization of the endowment is small enough. |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:635&r=cta |
| By: | Philippe Aghion; Ernst Fehr; Richard Holden; Tom Wilkening |
| Abstract: | In this paper we conduct a laboratory experiment to test the extent to which Moore and Repullo's subgame perfect implementation mechanism induces truth-telling in practice, both in a setting with perfect information and in a setting where buyers and sellers face a small amount of uncertainty regarding the good's value. We find that Moore-Repullo mechanisms fail to implement truth-telling in a substantial number of cases even under perfect information about the valuation of the good. This failure to implement truthtelling is due to beliefs about the irrationality of one's trading partner. Therefore, although the mechanism should - in theory - provide incentives for truth-telling, many buyers in fact believe that they can increase their expected monetary payoff by lying. The deviations from truth-telling become significantly more frequent and more persistent when agents face small amounts of uncertainty regarding the good's value. Our results thus suggest that both beliefs about irrational play and small amounts of uncertainty about valuations may constitute important reasons for the absence of Moore-Repullo mechanisms in practice. |
| Keywords: | Implementation theory, incomplete contracts, experiments |
| JEL: | D23 D71 D86 C92 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:189&r=cta |
| By: | Juan F. Escobar; Gastón Llanes |
| Abstract: | We study a class of repeated games with Markovian private information and characterize optimal equilibria as players become arbitrarily patient. We show that seemingly non-cooperative action may occur in equilibrium and serve as signals of changes in private information. Players forgive such actions, and use the information they convey to adjust their continuation play. However, to forgive is not to forget: players keep track of the number of aggressions and enter into a punishment phase if that number becomes suspiciously high. Our model explains features of long-run relationships that are only barely understood, such as equilibrium defaults, unilateral price cuts, collusive price leadership, graduated sanctions, and restitutions. We also explore a model in which interactions are frequent and show how increasing the persistence of the process of types reduces informational fictions. Key words: Keywords: Repeated games, adverse selection, signaling, tacit collusion, price leadership, price cuts, equilibrium defaults, graduated sanctions. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:edj:ceauch:311&r=cta |
| By: | Dalton, P.S. (Tilburg University, Center For Economic Research); Gonzalez Jimenez, V.H. (Tilburg University, Center For Economic Research); Noussair, C.N. (Tilburg University, Center For Economic Research) |
| Abstract: | Abstract: To boost employees’ performance, firms often offer monetary bonuses when production goals are reached. However, the evidence suggests that the particular level of a goal is critical to the effectiveness of this practice. Goals must be challenging yet achievable. Computing optimal goals when employees have private information about their own abilities is often not feasible for the firm. To solve this problem, we propose a compensation scheme in which workers set their own production goals. We provide a simple model of self-chosen goals and test its predictions in the laboratory. The evidence we<br/>find in the laboratory confirms our model’s predictions for men, but not for women. Men exert greater effort under the self-chosen goal contract system than under a piece rate contract. In contrast, women perform worse under the self-chosen goal contract. Further analysis suggests that this is because women fail to set goals that are challenging enough, because they are less likely to update their goals to take into account their improving performance as they repeat the task. |
| Keywords: | contracts; bonus; endogenous goals; productivity; intrinsic motivation; challenge seeking; gender differences |
| JEL: | C91 C92 J16 J24 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:35daceab-34bc-4bd2-b330-ec03da6b06b7&r=cta |
| By: | Toomas Hinnosaar |
| Abstract: | Risk-neutral sellers can extract high profits from risk-loving buyers by selling them lotteries. To limit this problem, gambling is heavily regulated in most countries. I show that protecting risk-loving buyers against profit-maximizing sellers is essentially impossible. Even if buyers are risk-loving in the weakest sense, the seller can construct a nonrandom winner-pays auction that ensures unbounded profits. The result holds even if the seller cannot use any mechanism that resembles a lottery and only requires that buyers are asymptotically risk loving. This condition is satisfied, for example, when preferences satisfy Savage’s axioms or with prospect theory preferences. |
| Keywords: | risk-loving agents, auctions, gambling, prospect theory |
| JEL: | D82 D44 C72 D81 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:404&r=cta |
| By: | Chen, Yongmin; Li, Jianpei |
| Abstract: | When procuring multiple products from competing firms, a buyer may choose separate purchase, pure bundling, or mixed bundling. We show that pure bundling will generate higher buyer surplus than both separate purchase and mixed bundling, provided that trade for each good is likely to be efficient. Pure bundling is superior because it intensifies the competition between firms by reducing their cost asymmetry. Mixed bundling is inferior because it allows firms to coordinate to the high prices associated with separate purchase. (Pure) bundling is more likely to be selected as a procurement strategy when: (i) the products' values are higher relative to their possible costs, (ii) costs for different goods are more negatively or less positively dependent, or (iii) the cost distribution of each product is more dispersed. |
| Keywords: | procurement, bundled procurement, separate purchase, bundling, mixed bundling |
| JEL: | D21 D44 L24 |
| Date: | 2015–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63423&r=cta |
| By: | Filomena Garcia (Indiana University and ISEG/UECE); Cecilia Vergari (University of Bologna) |
| Abstract: | Abstract: We determine the incentives for compatibility provision of firms that produce network goods with different intrinsic qualities. We consider the case in which both firms have the power to veto compatibility and the case in which none has this power. We obtain that if consumers have a strong preference for the network, there are multiple equilibria in pricing and consumer decisions. We show that in some equilibria, it is the high quality firm that invests in compatibility, whereas in others, the low quality fi rm triggers compatibility. The socially optimal compatibility level is zero, except under strong network effects, where one of the equilibria has all consumers buying the low quality good. In this case, a partial level of compatibility is optimal. Comparison between the privately and the socially optimal levels of compatibility depends on whether or not rms have veto power over compatibility. |
| Keywords: | Compatibility, vertical |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2015005&r=cta |
| By: | Elwyn Davies; Marcel Fafchamps |
| Abstract: | This paper uses experimental methods to study the impact of limited enforcement and reputation on employer-worker relations in labour markets in Ghana. Participants, students recruited from universities in Accra, Ghana are designated as either employers or workers and play a gift-exchange game on a tablet computer. In this game, employers make wage offers to workers, who can then choose to accept or reject and, after accepting, what effort level to exert. Five treatments were used to assess the impact of limited enforcement, competition between employers and reputation. Each participants plays four games, consisting of five trading periods. We find different results from earlier experiments in developed countries: while these experiments have found strong evidence for relational contracting and conditional reciprocity, we do not find evidence for this. We find that a subgroup of workers exerts very low effort levels, but that this low effort of the workers is not punished by employers, who are not responsive in their wage offers to what the workers did previously. As a result, on average, the workers capture most of the profits. Introducing competition or a multilateral reputation mechanism does not significantly improve this. |
| Keywords: | Relational contracting, conditional reciprocity, gift-exchange game, punishment strategies, Ghana |
| JEL: | C71 D2 D86 E24 O16 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:csa:wpaper:2015-08&r=cta |
| By: | ABADA, Ibrahim (GDF Suez); EHRENMANN, Andreas (GDF Suez); SMEERS, Yves (Universitécatholique de Louvain, CORE, Belgium) |
| Abstract: | Up to now, the European natural gas trade was dominated by bilateral long-term upstream agreements between producers and midstreamers that fixed a minimum volume to be exchanged (Take Or Pay) and a price formula that was usually indexed on oil products prices. These arrangements were believed to allow: i) market risk sharing between the producer (who takes the price risk) and the midstreamer (who takes the volume risk) as well as ii) risk hedging since oil is considered as a trusted commodity by investors. The fall of the European demand combined with the increase of the oil price favored the emergence of a gas volume bubble that caused net losses for most of the European midstreamers who were bound by long-term agreements. As a result, some energy economists brought forward the idea of indexing contracts on gas spot prices. In this paper, we present an equilibrium model that endogenously captures the contracting behavior of both the producer and the midstreamer who strive to hedge their profit-related risk. The players choose between gas forward and oil-indexed contracts. Using the model we show that i) contracting can reduce the trade risk of both the producer and midstreamer, ii) oil-indexed contracts should be signed only when oil and gas spot prices are well correlated, otherwise, these contracts hold less interest for risk mitigation, iii) contracts are more needed when the upstream cost structure is CAPEX driven and iv) a too risk-averse behavior of the midstreamer might deprive upstream investments and the downstream consumer surplus. |
| Date: | 2014–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2014036&r=cta |
| By: | Orazio Attanasio (University College London & Institute for Fiscal Studies); Corina Mommaerts (Dept. of Economics, Yale University); Costas Meghir (Cowles Foundation, Yale University) |
| Abstract: | We investigate partial insurance and group risk sharing in extended family networks. Our approach is based on decomposing income shocks into group aggregate and idiosyncratic components, allowing us to measure the extent to which each is insured, having accounted for public insurance programs. We apply our framework to extended family networks in the United States by exploiting the unique intergenerational structure of the PSID. We find that over 60% of shocks to household income are potentially insurable within family networks. However, we find little evidence that the extended family provides insurance for such idiosyncratic shocks. |
| Keywords: | Incomplete markets, Partial Insurance, Consumption smoothing, Extended Family Networks, Savings, Intergenerational transfers, Stochastic income processes |
| JEL: | D12 D31 D91 E21 E24 H31 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1996&r=cta |