nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2015‒06‒05
six papers chosen by
Guillem Roig
University of Melbourne

  1. Does Loan Maturity Matter in Risk-Based Pricing? Evidence from Consumer Loan Data By Gabriela Kuvikova
  2. Loans for Better Living: The Role of Informal Collateral By Gabriela Kuvikova
  3. On the Merit of Equal Pay: When Influence Activities Interact with Incentive Setting By Brice Corgnet; Ludivine Martin; Peguy Ndodjang; Angela Sutan
  4. Runs versus Lemons: Information Disclosure and Fiscal Capacity By Faria-e-Castro, Miguel; Martinez, Joseba; Philippon, Thomas
  5. Team Production benefits from a Permanent Fear of Exclusion By Anita Kopányi-Peuker; Theo Offerman; Randolph Sloof
  6. Investigating the Role of Contract Enforcement and Financial Costs on the Payment Choice: Industry-Level Evidence from Turkey By Türkcan, Kemal; Avşar, Veysel

  1. By: Gabriela Kuvikova
    Abstract: This paper investigates the role of loan contract terms in the performance of consumer credit. Taking advantage of a sample of accepted and rejected consumer loans from a Czech commercial bank, I estimate the elasticity of loan demand and find that borrowers with a high probability of default are more responsive to maturity than interest rate changes. I also argue that risk-based pricing may lead to an increase in loan maturity and loan default, rather than alleviating the adverse selection present on the lending market. Empirical evidence suggests that loan performance is time-dependent and default depends on the choice of loan duration.
    Keywords: credit scoring; consumer loans, asymmetric information
    JEL: D12 D14 D82 G21
    Date: 2015–04
  2. By: Gabriela Kuvikova
    Abstract: Consumers with insufficient resources can finance purchases by applying for specific purpose loans or unspecified purpose loans. I examine the default gap of these two types of loans by using a unique dataset of consumer loans from a Czech commercial bank. In line with theoretical models that perceive collateral as a screening device mitigating adverse selection, the paper confirms a negative relationship between the default rate and the presence of informal collateral. More importantly, it is not the purpose for the loan, but mainly the unobserved characteristics of the borrower that drive the default rate. The paper also provides empirical evidence that the interest rate differential between specific purpose loans and unspecified purpose loans is systematically higher than their default rate differential.
    Keywords: consumer loans; asymmetric information; collateral; default;
    JEL: D12 G14 G21
    Date: 2015–05
  3. By: Brice Corgnet (Chapman University, Economic Science Institute); Ludivine Martin (Luxembourg Institute of Socio-Economic Research); Peguy Ndodjang (Luxembourg Institute of Socio-Economic Research); Angela Sutan (ESC Dijon, LESSAC)
    Abstract: Influence costs models predict that organizations should limit managerial discretion to deter organizational members from engaging in wasteful politicking activities. We test this conjecture in a controlled, yet realistic, work environment in which we allow employees to influence managers’ decisions about rewards. We find that influence activities are pervasive and significantly lower organizational performance. Organizational performance suffers because principals offer weaker incentives when influence activities are allowed than when they are not. Importantly, we show that equal pay incentive schemes perform better when influence activities are available than when they are not. Our results thus support the idea that prevalent politicking activities may account for the widespread use of bureaucratic, and apparently inefficient, compensation rules in organizations.
    Keywords: Influence activities, incentive theory, theory of the firm, organizational economics
    JEL: C91 D23 D86 M52
    Date: 2015
  4. By: Faria-e-Castro, Miguel; Martinez, Joseba; Philippon, Thomas
    Abstract: We characterize the optimal use of information disclosure and fiscal backstops during financial crises. In our model, financial crises force governments to choose between runs and lemons. Revealing information about banks’ assets reduces adverse selection in credit markets, but it can also create inefficient runs on weak banks. A fiscal backstop mitigates this risk and allows the government to pursue a high disclosure strategy. A government with a strong fiscal position is more likely to run informative stress tests than a government with a weak fiscal position. As a result, such a government is also less likely to rely on outright bailouts.
    Keywords: bailouts; credit guarantees; deposit insurance; fiscal backstop; stress tests
    JEL: E5 E6 G1 G2
    Date: 2015–05
  5. By: Anita Kopányi-Peuker (Faculty of Economics and Business, University of Amsterdam, the Netherlands); Theo Offerman (Faculty of Economics and Business, University of Amsterdam, the Netherlands); Randolph Sloof (Faculty of Economics and Business, University of Amsterdam, the Netherlands)
    Abstract: One acclaimed role of managers is to monitor workers in team production processes and discipline them through the threat of terminating them from the team (Alchian and Demsetz, 1972). We extend a standard weakest link experiment with a manager that can decide to replace some of her team members at a cost. The amount of contractual commitment (‘termination possibilities’) and the precision of the manager’s monitoring information serve as treatment variables. Our results show that the fear of exclusion has a profound effect on team performance even if workers are imperfectly monitored; the most flexible contract induces the highest output while the one with no firing possibilities leads to the lowest production. However, once the fear is eliminated for some workers, because permanent workers cannot be fired after a probation phase, effort levels steadily decrease.
    Keywords: team-production; weakest-link game; exclusion; probation; experiment
    JEL: C72 C92 M51 M55
    Date: 2015–05–29
  6. By: Türkcan, Kemal; Avşar, Veysel
    Abstract: This paper examines the effect of legal and financial conditions on the payment contract choice by empirically testing the predictions of Schmidt-Eisenlohr’s (2013) model with actual bilateral industry level trade finance data (at 2-digit level) from Turkey. Our results show that an improvement in contract enforcement and an increase in the financing cost in the importing country (exporting country) increases (decreases) the share of post-shipment sales. For the share of pre-payment sales, the opposite effects are estimated. Finally we find that share of post-shipment sales (pre-payment sales) increases (decreases) in the number of products traded between partners in the past.
    Keywords: Method of Payments, Trade Finance, Contract Enforcement, Financial Costs, Post-Shipment, Pre-Payment, Turkey.
    JEL: F14 F30
    Date: 2015–05–29

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