nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2015‒06‒20
nine papers chosen by
Guillem Roig
University of Melbourne

  1. Contracting with Private Rewards By Rene Kirkegaard
  2. Pay package reshuffling and managerial incentives: A principal-agent analysis By Alessandro Fedele; Luca Panaccione
  3. "The value of personal information in markets with endogenous privacy" By Montes, Rodrigo; Sand-Zantman, Wilfried; Valletti, Tommaso
  4. Combining "Real Effort" with Induced Effort Costs: The Ball-Catching Task By Simon Gaechter; Lingbo Huang; Martin Sefton
  5. Team Incentives and Leadership By Michalis Drouvelis; Daniele Nosenzo; Martin Sefton
  6. Contract and Procurement Design for PPPs in Highways: the Road Ahead By Elisabetta Iossa
  7. Bailout Stigma By Yeon-Koo Che; Chongwoo Choe; Keeyoung Rhee
  8. How Does Collective Reputation Affect Hiring? Selection and Sorting in an Online Labour Market By Guo Xu
  9. Nudges, social norms and permanence in agri-environmental schemes By Laure Kuhfuss; Raphaële Préget; Sophie Thoye; Nick Hanley; Philippe Le Coent; Mathieu Désolé

  1. By: Rene Kirkegaard (Department of Economics and Finance, University of Guelph)
    Abstract: I extend the canonical moral hazard model to allow the agent to face endogenous and non-contractible uncertainty. The agent works for the principal and simultaneously pursues private rewards. I establish conditions under which the first-order approach remains valid. The model adds to the literature on intrinsic versus extrinsic motivation. Specifically, to induce higher effort at work the contract may offer higher rewards but flatter incentives. The contract change makes the agent reevaluate his “work-life balanceâ€. Larger employment rewards lessens the incentive to pursue private rewards. The greater reliance on labor income then necessitates weaker explicit incentives to induce high effort.
    Keywords: First-Order Approach, Intrinsic Motivation, Moral Hazard, Multi-tasking, Principal-Agent Models, Private Rewards
    JEL: D82 D86
    Date: 2015
  2. By: Alessandro Fedele (Free University of Bolzano‐Bozen, Faculty of Economics and Management); Luca Panaccione (DEDI and CEIS, Università Tor Vergata)
    Abstract: By deferring a significant portion of managers' remuneration, managers bear the risk of their choices for a longer period of time and avoid excessive risk taking. The effectiveness of this mechanism is jeopardized if managers reshuffle their pay packages; this is possible when trades in the components of pay packages are not verifiable. In this paper, we investigate the relevance of trade verifiability in pay packages design. We analyze a principal-agent model with agent's compensation made of different commodities which can be exchanged on competitive markets at given prices. We consider both the case when trades in commodities are verifiable, and when they are not. We prove that an optimal contract when trades are verifiable remains optimal when trades are not verifiable if agent's preferences for commodities are independent of the action performed. We provide examples to illustrate what happens when preferences' independence fails.
    Keywords: Pay package reshuffling, Principal-agent model, Independent preferences
    JEL: D82 D86 J33
  3. By: Montes, Rodrigo; Sand-Zantman, Wilfried; Valletti, Tommaso
    Abstract: This paper investigates the effects of price discrimination on prices, profits and consumer surplus, when one or more competing firms can use consumers' private information to price discriminate and consumers can pay a privacy cost to avoid it. While a monopolist always benefits from higher privacy costs, this is not true in the competing duopoly case. In this last case, firms' individual profits are decreasing while consumer surplus is increasing in the privacy cost. Finally, under competition, we show that the optimal selling strategy for the owner of consumer data consists in dealing exclusively with one firm in order to create maximal competition between the winner and the loser of data. This brings ineficiencies, and we show that policy makers should concentrate their attention on exclusivity deals rather than making it easier for consumers to protect their privacy.
    Keywords: Privacy, Information, Price Discrimination
    Date: 2015–05
  4. By: Simon Gaechter (Department of Economics, University of Nottingham.); Lingbo Huang (Department of Economics, University of Nottingham); Martin Sefton (Department of Economics, University of Nottingham)
    Abstract: We introduce the “ball-catching taskâ€, 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
    Date: 2015–08
  5. By: Michalis Drouvelis (Department of Economics, University of Birmingham.); Daniele Nosenzo (Department of Economics, University of Nottingham.); Martin Sefton (Department of Economics, University of Nottingham.)
    Abstract: We study, experimentally, how two alternative incentive mechanisms affect team performance, and how a team chooses between alternative mechanisms. We study a group incentive mechanism, where team output is shared equally among team members, and a hierarchical mechanism team output is allocated by a team leader. Our experiment examines these mechanisms in both homogeneous teams, where workers have identical productivities and in heterogeneous teams, where workers vary in their productivity. Our results are robust to whether teams are homogeneous or heterogeneous. We find that output is higher when a leader has the power to allocate output, but this mechanism also generates large differences between earnings of leaders and other team members. When team members can choose how much of team output is to be shared equally and how much is to be allocated by a leader, they tend to restrict the leader’s power to distributing less than half of the pie.
    Keywords: Team Production, Leadership, Reward Power, Delegation, Experiment
    Date: 2015–05
  6. By: Elisabetta Iossa (DEF and CEIS, Università di Roma "Tor Vergata" - IEFE-Bocconi, CEPR)
    Abstract: We review international practice in concession-based public private partnerships (PPPs) for highways, in the light of the economic theory of incentives, procurement and regulation. In particular, we analyse alternative funding mechanisms to cover highway costs, and their impact on demand risk allocation, incentives, cost of capital, and likelihood of renegotiation. We note how real tolls must pursue a number of contrasting objectives, which may be best served by introducing tariff discrimination. We discuss alternative tariff regulations used in practice and warn against tariff mechanisms that transfer demand risk to users and depart from the principles of price cap regulation. We highlight that it is desirable to transfer some traffic risk to the concessionaire but the level of risk transfer should be lower at the beginning of the contract, especially for greenfield projects where little demand information is initially available. We discuss the procurement of highway PPPs, focusing on the choice of the bidding variables, and on the distortions that renegotiations introduce at bidding stage. We stress the importance of strong institutions and absence of political interference in regulatory matters, and we highlight the benefit of respecting and standardizing contract terms.
    Keywords: contracting out, highways, incentives, procurement, regulation, transport
    JEL: D21 L2 L33 L5 L9
    Date: 2015–06–11
  7. By: Yeon-Koo Che; Chongwoo Choe; Keeyoung Rhee
    Abstract: Financially distressed firms may be reluctant to accept government bailouts for fear that it may signal the weakness of their balance sheets and inhibit future financing. We study such bailout stigma via a model in which a firm must finance projects by selling legacy assets. The value of the asset is the firm’s private information, which results in inefficient trading of the asset due to standard adverse selection. Although the adverse selection problem creates a scope for government intervention, accepting a bailout can signal the toxicity of the asset, which worsens the adverse selection for the firm in the subsequent trading of its asset. We find multiple equilibrium responses to a government bailout. Bailout terms that would otherwise be acceptable may be refused due to the stigma. Even terms that are so generous as to be acceptable for firms with non-toxic assets may result in low take-up; nevertheless, such a policy could be beneficial indirectly by allowing a firm to improve its market perception by refusing the bailout. Bailout that leads to immediate market rejuvenation is welfare-dominated by an equilibrium without such market rejuvenation. A secret bailout that conceals the identity of its recipient can mitigate the stigma and can implement the (constrained) efficient outcome.
    Keywords: Adverse selection, bailout stigma, secret bailout
    Date: 2015–04
  8. By: Guo Xu
    Abstract: How does collective reputation affect hiring and selection into jobs? Using detailed hiring data from a global online labour market, where the country of residence is the salient group characteristic, we document a mechanism through which collective reputation can perpetuate initial group inequality. Using an instrumental variable strategy, we first identify reputational externalities between an employer's very first hire and the propensity to contract more workers from the same country. Employers, contingent on their first worker's performance (as measured by a public rating), go on to almost exclusively hire from the same country. This coincides with a strong and positive supply-side sorting response: Observing their predecessor's success, workers from the same country are more likely to apply and tend to be of higher quality. Employers, facing better applicants, are in turn more likely to continue providing top ratings for later hires from the first hire country. Collective reputation hence appears to serve as a coordination device that enables workers to positively sort with employers: Good workers then attract more good workers from the same country and vice versa.
    JEL: J7 J16 L14
    Date: 2015–05
  9. By: Laure Kuhfuss (Department of Geography and Sustainable Development, University of St. Andrews); Raphaële Préget (INRA, UMR 1135 LAMETA, F-34000 Montpellier, France); Sophie Thoye (Montpellier SupAgro, UMR 1135 LAMETA, F-34000 Montpellier, France); Nick Hanley (Department of Geography and Sustainable Development, University of St. Andrews); Philippe Le Coent (Université Montpellier 1, UMR 5474 LAMETA, F-34000 Montpellier, France); Mathieu Désolé (Montpellier SupAgro, UMR 1135 LAMETA, F-34000 Montpellier, France)
    Abstract: The permanence of land management practices adopted under Agri-environmental schemes (AES) is often questioned. This paper investigates the drivers of farmers’ decision to maintain or not the adopted practices beyond the duration of the contract, and especially the effect of social norms and framing on this decision. Our results, based on the stated intentions of 395 farmers, show that pecuniary but also non-pecuniary motivations drive farmers’ decision, which is significantly influenced by information about the social norm. These results lead to recommendations for “nudging” farmers, by conveying information to them on other farmers’ decisions concerning pro-environmental land management practices.
    Keywords: Agri-environmental schemes, Permanence, Framing, Social norms
    JEL: Q18 Q28
    Date: 2015–05

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