nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2015‒05‒02
thirteen papers chosen by
Guillem Roig
University of Melbourne

  1. The management of natural resources under asymmetry of information By Gérard Gaudet; Pierre Lasserre
  2. Efficient Allocations in Economies with Asymmetric Information when the Realized Frequency of Types is Common Knowledge By Aristotelis Boukouras; Kostas Koufopoulos
  3. The Role of Bounded Rationality and Imperfect Information in Subgame Perfect Implementation: An Empirical Investigation By Aghion, Philippe; Fehr, Ernst; Holden, Richard; Wilkening, Tom
  4. Climate policies with private information: The case for unilateral action By Carsten Helm; Franz Wirl
  5. Separation of Ownership and Control: Delegation as a Commitment Device By Aristotelis Boukouras
  6. Shared Mandates, Moral Hazard, and Political (Mis)alignment in a Decentralized Economy By Antonio Estache; Grégoire Garsous; Ronaldo Seroa da Motta
  7. Worker Mobility in a Search Model with Adverse Selection By Carlos Carrillo-Tudela; Leo Kaas
  8. Financial Intermediation and Deposit Contracts: A Strategic View By Vittorio Larocca
  9. Collateral and Local Lending: Testing the Lender-Based Theory By Andrea Bellucci; Alexander Borisov; Germana Giombini; Alberto Zazzaro
  10. Financing Smallholder Agriculture: An Experiment with Agent-Intermediated Microloans in India By Pushkar Maitra; Sandip Mitra; Dilip Mookherjee; Alberto Motta; Sujata Visaria
  11. Market for Corporate Control and Contractual Buyout (CoBO): A New “Collective Ownership-and-Administrative” Strategy By Reddy, Kotapati Srinivasa
  12. The Climate Policy Hold-Up: Green Technologies,Intellectual Property Rights, and the Abatement Incentives of International Agreements By Goeschl, Timo; Perino, Grischa
  13. Has Performance Pay Increased Wage Inequality in Britain? By Bryan, Mark L.; Bryson, Alex

  1. By: Gérard Gaudet; Pierre Lasserre
    Abstract: We provide an introductory review to the application of the theory of incentives under asymmetry of information to the exploitation and management of natural resources. We concentrate mostly on principalagent problems with adverse selection as posed by the regulation of nonrenewable resources, stressing the fact that the inherently dynamic nature of natural resource exploitation creates situations and results not found in other contexts. We also point out private information issues that may arise involving renewable as opposed to nonrenewable resources, strategic interactions with signalling between decision makers in resource exploitation games, and the design of environmental policy where principal-agent problems subject to moral hazard may occur
    Keywords: Natural resources, asymmetric information, incentive mechanisms, adverse selection, regulation, Natural resources, asymmetric information, incentive mechanisms, adverse selection, regulation
    Date: 2015–04–23
  2. By: Aristotelis Boukouras; Kostas Koufopoulos
    Abstract: We consider a general economy, where agents have private information about their types. Types can be multi-dimensional and potentially interdependent. We show that, if the realized frequency of types (the exact number of agents for each type) is common knowledge, then a mechanism exists, which is consistent with truthful revelation of private information and which implements first-best allocations of resources as the unique equilibrium. The result requires the single crossing property on utility functions and the anonymity of the Pareto correspondence.
    Keywords: adverse selection, first-best, full implementation, mechanism design, single-crossing property
    JEL: D71 D82 D86
    Date: 2015–04
  3. By: Aghion, Philippe (Harvard University); Fehr, Ernst (University of Zurich); Holden, Richard (University of New South Wales); Wilkening, Tom (University of Melbourne)
    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 truth-telling 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: 2015–04
  4. By: Carsten Helm (University of Oldenburg, Department of Economics); Franz Wirl
    Abstract: Countries often have private information about their willingness to pay for protecting the climate system and their cost of emission reductions. We use a principal-agent model to re-examine the economic case for unilateral action by individual countries, in our case of the principal. We ?nd that the incentive structure that arises in an incomplete information framework can motivate (i) unilateral action before contract negotiations, (ii) optimal contracts in which the principal accepts higher marginal abatement costs for herself, as well as (iii) overcompliance by the principal after the contract has been negotiated. Multilateral externalities and type-dependent outside options, which are characteristic for climate policies, play a crucial role to explain these results.
    Keywords: unilateral action, voluntary action, unilateral commitment, private information, multilateral externalities, international environmental agreements, type-dependent outside options
    JEL: D82 Q54 H87
    Date: 2015–04
  5. By: Aristotelis Boukouras
    Abstract: This paper provides a theoretical model for explaining the separation of ownership and control in fi rms. An entrepreneur hires a worker for providing effort to complete a project. The worker's effort determines the probability that the project is completed on time, but the worker receives private benefit s for every period she is employed. We show that hiring a manager on a short-term contract may increase firm value and we identify the conditions under which separation of ownership and control is optimal.
    Keywords: commitment problem, control rights, control structure, moral hazard, private bene t, separation of ownership and control, soft-budget constraint, strategic delegation
    JEL: D86 G34 J31 L22 L26
    Date: 2015–04
  6. By: Antonio Estache; Grégoire Garsous; Ronaldo Seroa da Motta
    Abstract: This paper investigates the effects of political (mis)alignment on public service delivery when mandates are shared between state and local governments. We analyze sewage treatment policies in the state of São Paulo, Brazil. Relying on difference-in-differences estimations, we establish a causal relationship between political alignment and higher sewage treatment provision. Conceptually, we find that, with uncertain local commitment and weakly enforceable local obligations, shared mandates lead to a moral hazard issue implying service under-provision. Our results show that political alignment attenuates such moral hazard effects.
    Keywords: Transparency & Anticorruption, Public Utilities, Public Services, Municipal management, Wastewater treatment, Sewerage, Sanitation, Decentralization, Political alignment, Infrastructure provision, Water and sanitary services, Moral
    Date: 2015–03
  7. By: Carlos Carrillo-Tudela (University of Essex); Leo Kaas (University of Konstanz)
    Abstract: We analyze the effects of adverse selection on worker turnover and wage dynamics in a frictional labor market. We consider a model of on-the-job search where firms offer promotion wage contracts to workers of different ability, which is unknown to firms at the hiring stage. With sufficiently strong information frictions, low-wage firms offer separating contracts and hire all types of workers in equilibrium, whereas high-wage firms offer pooling contracts, promoting high-ability workers only. Low-ability workers have higher turnover rates and are more often employed in low-wage firms. The model replicates the negative relationship between job-to-job transitions and wages observed in the U.S. labor market.
    Keywords: Adverse Selection, On-the-job search, Worker mobility, Wage dynamics
    JEL: J63 J64
    Date: 2015–04
  8. By: Vittorio Larocca (ETH Zurich, Switzerland)
    Abstract: This paper investigates competition among financial intermediaries in a finite-trader version of the Diamond and Dybvig (1983) economy under no aggregate uncertainty. The economy is populated by self-interested financial intermediaries that compete strategically over deposit contracts offered to consumers. Both exclusive and nonexclusive competition perspective are considered, in both cases multiple equilibria arise if banks do not have an initial endowment. When financial intermediaries have a sufficient level of endowment, regardless the competition perspective adopted, the first best allocation is the unique equilibrium allocation.
    Keywords: financial intermediation; deposit contracts.
    JEL: D82 G21
    Date: 2015–04
  9. By: Andrea Bellucci (Institute for Applied Economic Research (IAW), University of Tubingen, Germany); Alexander Borisov (University of Cincinnati, USA); Germana Giombini (Universit… di Urbino); Alberto Zazzaro (Universit… Politecnica delle Marche, MoFiR - Ancona, Italy, CSEF, Naples, Italy)
    Abstract: In this paper we empirically test the recent lender-based theory for the use of collateral in bank lending. Based on a proprietary dataset of loan contracts written by a local bank in competitive credit markets, we use the physical proximity between borrowers and the lending branch of the bank to capture its information advantage and the magnitude of collateral-related transaction costs. Overall, our results seem more consistent with several classic borrower-based explanations rather than with the lender-based view. We show that, conditional on obtaining credit from the local bank, more distant borrowers experience higher collateral requirements and lower interest rates. Moreover, competitive pressure from transaction lenders does not magnify the importance of lender-to-borrower distance. Our findings are also obtained with estimation techniques that allow for endogenous loan contract terms and joint determination of collateral and interest rates.
    Keywords: Bank lending, Collateral, Distance, Interest Rate
    JEL: G21 G32 L11
    Date: 2015–04
  10. By: Pushkar Maitra (Department of Economics, Monash University); Sandip Mitra (Sampling and Ocial Statistics Unit, Indian Statistical Institute); Dilip Mookherjee (Department of Economics, Boston University); Alberto Motta (School of Economics, University of New South Wales); Sujata Visaria (Department of Economics, Hong Kong University of Science and Technology; Institute for Emerging Market Studies, Hong Kong University of Science and Technology)
    Abstract: Recent evaluations of traditional microloans have not found significant impacts on borrower production or incomes. We examine whether this can be remedied by delegating selection of borrowers for individual liability loans to local trader-lender agents incentivized by repayment-based commissions. In a field experiment in West Bengal this design (called TRAIL) was offered in randomly selected villages. In remaining villages five-member groups self-formed and applied for joint liability loans (called GBL) with otherwise similar terms. TRAIL loans increased production of potato (a leading cash crop) and farm incomes by 27-37%, whereas GBL loans had insignificant and highly dispersed effects. Both schemes achieved equally high repayment rates, while TRAIL loans had higher take-up rates and lower administrative costs. We argue the results can be partly explained by differences in selection patterns with respect to borrower risk and productivity characteristics.
    Keywords: agricultural finance, agent based lending, group lending, selection, repayment
    JEL: D82 O16
    Date: 2015–04
  11. By: Reddy, Kotapati Srinivasa
    Abstract: Contractual buyout (CoBO) is a new “collective ownership and joint administrative strategy”, which gives an opportunity to buy a target firm in the given period when the given contract ends between acquirer, target firm, and financier. It is a takeover defensive method and tends to avail tax advantage via entering CoBO deal. In particular, it would be efficient inorganic magnetic for international venture capitalists and private equity firms while entering foreign markets. More specifically, CoBO is likely a concept of Dating-before-Merging and it would be the better model for cross-border mergers and acquisitions integration strategy. The explored CoBO propositions may be useful in various implications such as information symmetry and administrative changes, employment and employee role, operating performance and financial arrangement, tax savings, choice of market entry strategy, integration strategy, and government and policy makers. We recommend the developed country investors choose CoBO as investment vehicle to avail the competent business opportunities in both emerging and budding economies.
    Keywords: Contractual buyout; Collective ownership; Inorganic strategy; Leveraged buyout; Market for corporate control; Mergers and acquisitions; Strategic alliances, Takeovers
    JEL: F2 F21 F23 F4 L1 L2 L5 M1 M16
    Date: 2015
  12. By: Goeschl, Timo; Perino, Grischa
    Abstract: The success of global climate policies over the coming decades depends on the diffusion of 'green' technologies. This requires that international environmental agreements (IEAs) and trade-related intellectual property rights (TRIPs) interact productively.Using a simple and tractable model, we highlight the strategic reduction in abatement commitments on account of a hold-up effect. In anticipation of rent extraction by the innovator signatories might abate less than non-signatories turning the IEA 'brown'. Self-enforcing IEAs have fewer signatories and diffusion can reduce global abatement under TRIPs. Countries hosting patent holders extract rents from TRIPs, but may be better off without them.
    Keywords: International climate policy; diffusion of innovations; intellectual property rights; hold-up problem.
    Date: 2015–04–20
  13. By: Bryan, Mark L. (University of Essex); Bryson, Alex (National Institute of Economic and Social Research (NIESR))
    Abstract: Using data from the British Household Panel Survey (BHPS) we show performance pay (PP) increased earnings dispersion among men and women, and to a lesser extent among full-time working women, in the decade of economic growth which ended with the recession of 2008. PP was also associated with some compression in the lower half of the wage distribution for women. The effects were predominantly associated with a broad measure of PP that included bonuses. However, these effects were modest and there is no indication that PP became increasingly prevalent, as some had predicted, over the decade prior to recession.
    Keywords: wages, wage inequality, performance pay, bonuses
    JEL: J31 J33
    Date: 2015–04

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