nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2015‒05‒22
ten papers chosen by
Guillem Roig
University of Melbourne

  1. Push or pull? By David Rietzke
  2. On imperfect commitment in contracts By Aggey Semenov
  3. Who goes first? Strategic Delay and Learning by Waiting By Wagner, Peter
  4. Combining "Real Effort" with Induced Effort Costs: The Ball-Catching Task By Gächter, Simon; Huang, Lingbo; Sefton, Martin
  5. Private versus Social Incentives for Pharmaceutical Innovation By Paula González; Inés Macho-Stadler; David Pérez-Castrillo
  6. Dynamic Investment with Adverse Selection and Moral Hazard By Miguel Cantillo
  7. Informal Labor Contracts: a Solution or a Problem? By Ricardo Barros; Ricardo Mello; Valéria Pero
  8. Can helping the sick hurt the able? Incentives, information and disruption in a disability-related welfare reform By Nitika Bagaria; Barbara Petrongolo; John Van Reenen
  9. The Simple Economics of Motor Vehicle Pollution: A Case for Fuel Tax By Montag, Josef
  10. Intellectual Property Rights Protection and Trade By Auriol, Emmanuelle; Biancini, Sara; Paillacar, Rodrigo

  1. By: David Rietzke
    Abstract: In the funding of R&D, push mechanisms, such as research grants, subsidize research input, while pull mechanisms, such as innovation prizes, reward research output. By rewarding research output, pull mechanisms create strong incentives for researchers to devote non observable inputs to R&D. Push mechanisms, in contrast, may reward a researcher independently of her output. In the presence of moral hazard, it might seem that push mechanisms generate weak incentives for non observable inputs from the researcher and, absent risk-sharing considerations, would be inferior to pull mechanisms; it is the aim of this paper to critically assess this hypothesis. I analyze a principal-agent model in which a funder encourages R&D activity through a push incentive (a grant) and/or a pull incentive (a prize); R&D input consists of both an observable and non observable component. In contrast to the stated hypothesis, it is shown that a grant may emerge as an optimal means of funding as a result of the interaction between adverse selection and moral hazard. The model also helps to explain the use of matching grants, it is shown that such grants serve as an effective sorting device in the presence of adverse selection.
    Keywords: grants, prizes, moral hazard, adverse selection, innovation, principal-agent problem
    JEL: D82 D86
    Date: 2015
  2. By: Aggey Semenov (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: In this paper I consider a repeated buyer-seller relationship wherein a seller has private information on his fixed cost parameter. Once a buyer pays for the good - but before its delivery - he may fear opportunistic behavior by the seller; the latter may prefer not to produce, in which case he pays a penalty and the trade is terminated. Depending on the magnitude of the penalty and the valuation of the future I identify three contractual regimes corresponding to the strength of legal system. The optimal stationary contract consists of two distinct parts. For the most efficient types of seller, the contract entails bunching with a fixed payment and a fixed output. For higher costs output is significantly reduced below the optimal static mechanism.
    Keywords: Adverse selection, penalty for breach, discount rate
    JEL: D82 D86
    Date: 2015
  3. By: Wagner, Peter
    Abstract: This paper considers a "war of attrition" game in which agents learn about an uncertain state of the world through private signals and from their peers. I provide existence and uniqueness results for a class of equilibria that satisfy a "full-participation" condition, and show that asymmetries in the distribution of information can lead to excessive stopping and an oversupply of information relative to the social optimum.
    Date: 2015–05–04
  4. By: Gächter, Simon (University of Nottingham); Huang, Lingbo (University of Nottingham); Sefton, Martin (University of Nottingham)
    Abstract: We introduce the "ball-catching task", a novel computerized real effort task, which combines “real” efforts with induced material cost of effort. The central feature of the ball-catching task is that it allows researchers to manipulate the cost of effort function as well as the production function, which permits quantitative predictions on effort provision. In an experiment with piece-rate incentives we find that the comparative static and the point predictions on effort provision are remarkably accurate. We also present experimental findings from three classic experiments, namely, team production, gift exchange and tournament, using the task. All of the results are closely in line with the stylized facts from experiments using purely induced values. We conclude that the ball-catching task combines the advantages of real effort with induced values, which is useful for theory-testing purposes as well as for applications.
    Keywords: experimental design, real effort task, induced values, incentives, piece-rate theory, team incentives, gift exchange, tournaments, online real effort experiments
    JEL: C91 C92 J41
    Date: 2015–05
  5. By: Paula González (Department of Economics, Universidad Pablo de Olavide.); Inés Macho-Stadler (Department of Economics, Universitat Autònoma de Barcelona and Barcelona GSE.); David Pérez-Castrillo (Department of Economics, Universitat Autònoma de Barcelona and Barcelona GSE.)
    Abstract: There is a great deal of debate in society regarding the tendency of pharmaceutical companies to direct their R&D toward marketing products that are "follow-on" drugs of already existing drugs, rather than the development of breakthrough drugs. This paper provides a theoretical framework to study firm incentives for pharmaceutical innovation that disentangle the quest for breakthrough drugs from the firm effort to develop follow-on drugs. We construct a model with a population of patients treated with one of two --horizontally and vertically differentiated-- drugs. One of the drugs is the pioneer; the other is the result of an innovative process by a firm that seeks to achieve an improvement over the existing drug. Our results offer theoretical support for the conventional wisdom that pharmaceutical firms devote too many resources to conducting R&D activities that lead to incremental innovations.
    Keywords: pharmaceuticals, R&D activities, me-too drugs, breakthrough drugs, incremental innovation, radical innovation.
    JEL: I1 L1
    Date: 2015–05
  6. By: Miguel Cantillo (Universidad de Costa Rica)
    Abstract: This paper develops a dynamic model of capital structure and investment. In a world with low and high ability managers, the former mask as the latter, but to do so have to overstate both earnings and investment. Debt is a mechanism that eventually separates investors’ abilities, at the cost of intervening unlucky high productivity managers. Immediate separation is counterproductive, as it generates costs and no expected payoff. The security design that asymptotically implements optimal investment includes the use of excess non-operating cash, of proportional cash flow compensation, and of ”golden parachutes”. Relative to a first best case, high ability managers will underinvest. Low ability managers will generally overinvest, except when their firm is close to bankruptcy, in which case they will loot the company by underinvesting and overstating their earnings.
    Date: 2015–03
  7. By: Ricardo Barros; Ricardo Mello; Valéria Pero
    Date: 2015–01
  8. By: Nitika Bagaria; Barbara Petrongolo; John Van Reenen
    Abstract: Disability rolls have escalated in developed nations over the last 40 years. The UK, however, stands out because the numbers on these benefits stopped rising when a welfare reform was introduced that integrated disability benefits with unemployment insurance (UI). This policy reform improved job information and sharpened bureaucratic incentives to find jobs for the disabled (relative to those on UI). We exploit the fact that policy was rolled-out quasi-randomly across geographical areas. In the long-run the policy improved the outflows from disability benefits by 6% and had an (insignificant) 1% increase in unemployment outflows. This is consistent with a model where information helps both groups, but bureaucrats were given incentives to shift effort towards helping the disabled find jobs and away from helping the unemployed. Interestingly, in the short-run the policy had a negative impact for both groups, suggesting important disruption effects. We estimate that it takes about six years for the estimated benefits of the reform to exceed its costs, which is beyond the time horizon of most policy-makers.
    JEL: H53 I13 I38 J14 J18 J64
    Date: 2015–05
  9. By: Montag, Josef
    Abstract: The volume of pollution produced by an automobile is determined by driver's behavior along three margins: (i) vehicle selection, (ii) kilometers driven, and (iii) on-road fuel economy. The first two margins have been studied extensively, however the third has received scant attention. How significant is this 'intensive margin'? What would be the optimal policies when it is taken into account? The paper develops and analyzes a simple model of the technical and behavioral mechanisms that determine the volume emissions produced by a car. The results show that an optimal fuel tax would provide drivers with appropriate incentives along all three margins and that only public information is needed for a fuel tax to be set optimally. In contrast, an optimal distance tax would require private information. Lastly, relative to the optimal fuel tax, a simple uniform fuel tax is shown to be progressive. Thus, being already deployed worldwide, a uniform fuel tax is an attractive second-best policy. These findings should be accounted for when designing new mechanisms to alleviate motor vehicle pollution.
    Keywords: automobile externalities, car pollution, CO2 emissions, fuel economy, driving behavior, distance tax, fuel tax.
    JEL: H23 Q58 R41 R48
    Date: 2015–05–04
  10. By: Auriol, Emmanuelle; Biancini, Sara; Paillacar, Rodrigo
    Abstract: The paper studies developing countries' incentives to protect intellectual property rights (IPR). IPR enforcement is U-shaped in a country's market size relative to the aggregated market size of its trade partners: small/poor countries protect IPR to get access to advanced economies' markets, while large emerging countries tend to free-ride on rich countries' technology to serve their internal demand. Asymmetric protection of IPR, strict in the North and lax in the South, leads in many cases to a higher level of innovation than universal enforcement. An empirical analysis conducted with panel data covering 112 countries and 45 years supports the theoretical predictions.
    Keywords: developing countries; imitation; innovation; intellectual property rights; oligopoly; trade policy
    JEL: F12 F13 F15 L13 O31 O34
    Date: 2015–05

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