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on Contract Theory and Applications |
| By: | Nicola Gennaioli; Giacomo A. M. Ponzetto |
| Abstract: | We model the joint evolution of contracts and precedents by introducing imperfect enforcement into a standard incomplete contracts setup. We assume that biased trial courts can refuse to verify novel evidence but are bound to respect precedents, namely to verify evidence that other judges verified in past cases. We find that optimal contracts are innovative (contingent on both precedents and novel evidence), but noisy evidence and judicial biases introduce enforcement risk and cause incentives to be low-powered. Litigation of innovative contracts refines the law, making it more informative. This evolution improves enforcement and makes contracts more complete, thereby enabling higher-powered incentives and improving welfare. This beneficial mechanism is hampered by judicial bias, which slows down legal evolution and causes enforcement risk to persist for a long time. |
| Keywords: | contracts, imperfect enforcement, legal evolution, precedents |
| JEL: | D86 K12 K40 K41 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:836&r=cta |
| By: | Holger Herbst |
| Abstract: | This paper studies the role of exchange policies as a price discrimination device in a sequential screening model with heterogeneous goods. In the first period, agents are uncertain about their ordinal preferences over a set of horizontally differentiated goods, but have private information about their intensity of preferences. In the second period, each individual privately learns his preferences and consumption takes place. Revenue maximizing mechanisms are completely characterized. They partially restrict the flexibility between the goods in the second stage for consumers that care little about which variety they obtain while granting always the favorite good to consumers that care much. The optimal design of the partial restriction of flexibility can be implemented by offering Limited Exchange Contracts. A Limited Exchange Contract consists of an initial product choice and a subset of products to which free exchange is possible in the second period. The use of exchange fees in contracts is not optimal for the purpose of price discrimination. |
| Keywords: | Sequential screening, dynamic mechanism design,heterogeneous goods |
| JEL: | D42 D82 L12 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse01_2015&r=cta |
| By: | Andrea Bellucci; Alexander Borisov; Germana Giombini; Alberto Zazzaro |
| 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: | Distance, Collateral, Interest Rate, Bank lending |
| JEL: | G21 G32 L11 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:iaw:iawdip:119&r=cta |
| By: | Kunte, Sebastian; Wollni, Meike |
| Abstract: | Contract flexibility can be expedient for economic exchange in environments with high ambiguity and risk, but may also encourage opportunistic behavior. We run a modified investment game, including the choice between two different contract designs and asymmetric information about the realized surplus (i.e., hidden knowledge). We examine if Nairobi slum dwellers choose flexible over rigid contracts when interacting in risky environments and whether preferences for contract flexibility are sensitive to the exogenous probability of experiencing a negative shock. We find that most interaction is realized through flexible agreements. Principals offer a higher level of flexibility if the likelihood of a shock is high, relative to the low-risk environment. Agents are somewhat more reluctant to sign rigid agreements when facing the threat of a bad state. While agents and the overall efficiency benefit from higher flexibility, principals always do better by opting for a rigid contract. |
| Keywords: | contract flexibility, risk sharing, hidden knowledge, artefactual field experiment, investment game, Nairobi slums, Kenya, Institutional and Behavioral Economics, Risk and Uncertainty, C72, D82, L14, O12, |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:ags:gagfdp:205914&r=cta |
| By: | Massimo Filippini (Institute of Economics (IdEP), University of Lugano; Swiss Federal Institute of Technology (ETH), Zurich, Switzerland); Martin Koller (Swiss Federal Institute of Technology (ETH), Zurich, Switzerland); Giuliano Masiero (Department of Management, Information and Production Engineering (DIGIP), University of Bergamo, Italy; Institute of Economics (IdEP), University of Lugano, Switzerland) |
| Abstract: | The purpose of this study is to assess differences in the levels of cost efficiency of bus lines operated under competitively tendered contracts and performance-based negotiated contracts. Following the revision of the Swiss railways act in 1996, regional public authorities were given the choice between two different contractual regimes to procure public passenger transport services. We directly compare the impact of competitive tendering and performance-based negotiation by applying a stochastic frontier analysis to the complete dataset of bus lines (n=630) operated by the main Swiss company (Swiss Post) at the same time (in 2009) throughout the country. The overall results show that the differences in the levels of cost efficiency between the two contractual regimes are not signi?cant. Our findings are in line with recent evidence of cost convergence between competitive tendering and performance-based negotiation, and suggest that the practice of using both contractual regimes is challenging for the operators in terms of competitive pressure. The threat of competitive tendering may have a disciplining effect on negotiation since it prevents bus companies from bargaining inadequate rents and inducing asymmetric information advantages. |
| Keywords: | public bus contracts, competitive tendering, performance-based negotiation, cost efficiency |
| JEL: | C21 D24 H57 L92 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:lug:wpidep:1504&r=cta |
| By: | Baldursson, Fridrik Mar (Reykjavik University, School of Business); von der Fehr, Nils-Henrik (Dept. of Economics, University of Oslo) |
| Abstract: | A government wants to exploit a renewable resource, yielding a timevarying flow of rent, by leasing it at a fixed rate. Leasing contracts can be expropriated before expiration, albeit at a cost. To minimise transactions costs and avoid the ‘resource curse’ the government would prefer to enter into an infinitely long contract (i.e. sell the resource), if it could commit not to expropriate. However, with finite costs of expropriation credible commitment is impossible: the government either enters into finite contracts, expropriates with positive probability or does both. The value of the resource to the government is increasing in the cost of expropriation, but decreasing in the variability of the resource rent. |
| Keywords: | Natural resources; sovereign expropriation; optimal contract length |
| JEL: | D86 Q02 |
| Date: | 2015–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2015_005&r=cta |
| By: | Arellano, Cristina (Federal Reserve Bank of Minneapolis); Atkeson, Andrew (Federal Reserve Bank of Minneapolis); Wright, Mark L. J. (Federal Reserve Bank of Chicago) |
| Abstract: | The recent debt crises in Europe and the U.S. states feature similar sharp increases in spreads on government debt but also show important differences. In Europe, the crisis occurred at high government indebtedness levels and had spillovers to the private sector. In the United States, state government indebtedness was low, and the crisis had no spillovers to the private sector. We show theoretically and empirically that these different debt experiences result from the interplay between differences in the ability of governments to interfere in private external debt contracts and differences in the flexibility of state fiscal institutions. |
| Keywords: | Debt crises; Sudden stops; Interference with private contracts; Tax flexibility |
| JEL: | F3 H7 K1 |
| Date: | 2015–07–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:515&r=cta |
| By: | Romero, Christina; Wollni, Meike |
| Abstract: | Linking small farmers to global markets through contract farming has become an important policy recommendation aiming to increase farmers’ income and foster rural development. Nevertheless, some of the arrangements involving small farmers have been reported to loose participants or collapse over time. Trust is an informal institution that can discourage opportunism and facilitate the compliance of contracts in a setting with an expensive and weak legal system. Nevertheless, the study of trust has been addressed mostly in lab experiments, but in the agribusiness context it has been addressed only by a few authors in a rather descriptive way. We use a framed field experiment with prior signaling on a sample of 180 small broccoli farmers in the highlands of Ecuador to explore the effect of opportunistic behavior on small farmers´ trust. The results reveal that this group of farmers has lower than average trust towards unknown people. Furthermore, we use a signal that mimics the payment of a loan by the B partner as treatment in the predesigned trust game. Results show that a positive signal increases trust, but a negative signal has no effect on it. Reacting slowly to external negative signs can threaten individuals who will not protect themselves towards opportunism. If farmers do not react quickly enough, they might face larger losses and will not be able to stay in business. In addition, if informal norms include weak sanctions, contract farming will be less likely and individuals will prefer the spot market were only one-time exchanges take place. |
| Keywords: | small farmers, trust, experiments, signaling, delay on payment, Institutional and Behavioral Economics, D02, Q13, |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:ags:gagfdp:206382&r=cta |