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on Contract Theory and Applications |
| By: | Ester Manna (Facultat d'Economia i Empresa; Universitat de Barcelona (UB)) |
| Abstract: | I develop a principal-agent model where a profit-maximizing principal employs two agents to undertake a project. The employees differ in terms of their intrinsic motivation towards the project and this is their private information. I analyze the impact of individual and team incentives on the screening problem of employees with different degrees of motivation within teams. If the principal conditions each agent's wage on his own level of effort (individual incentives), an increase of the rents paid to the motivated agents results in a lower level of effort exerted by all agents in the second-best. In this case, reversal incentives occur. Conversely, reversal incentives do not arise if the principal uses team-incentives. If the principal conditions each agent's wage on the effort of both agents and the agent's performance on the effort of his colleague (team-incentives), motivated agents exert the same level of effort as in the first-best. |
| Keywords: | Intrinsically Motivated Agents, Team Production, Adverse Selection, Individual and team incentives, Reversal Incentives. |
| JEL: | D03 D82 M54 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ewp:wpaper:326web&r=cta |
| By: | Ina A Taneva |
| Abstract: | There are two ways of creating incentives for interacting agents to behave in a desired way. One is by providing appropriate payoff incentives, which is the subject of mechanism design. The other is by choosing the information that agents observe, which we refer to as information design. We consider a model of symmetric information where a designer chooses and announces the information structure about a payoff relevant state. The interacting agents observe the signal realizations and take actions which affect the welfare of both the designer and the agents. We characterize the general finite approach to deriving the optimal information structure for the designer - the one that maximizes the designer's ex ante expected utility subject to agents playing a Bayes Nash equilibrium. We then apply the general approach to a symmetric two state, two agent, and two actions environment in a parameterized underlying game and fully characterize the optimal information structure: it is never strictly optimal for the designer to use conditionally independent private signals; the optimal information structure may be a public signal or may consist of correlated private signals. Finally, we examine how changes in the underlying game affect the designer's maximum payoff. This exercise provides a joint mechanism/information design perspective. |
| Keywords: | informtion design, implementation, incomplete information, Bayes correlated equilibrium, sender-receiver games |
| JEL: | C72 D72 D82 D83 |
| Date: | 2015–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:256&r=cta |
| By: | Gennaioli, Nicola; Ponzetto, Giacomo AM |
| 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: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10700&r=cta |
| By: | Ennis, Huberto M. (Federal Reserve Bank of Richmond); Keister, Todd (Rutgers University) |
| Abstract: | We study a finite-depositor version of the Diamond-Dybvig model of financial intermediation in which the bank and all depositors observe withdrawals as they occur. We derive the constrained efficient allocation of resources in closed form and show that this allocation provides liquidity insurance to depositors. The contractual arrangement that decentralizes this allocation resembles a standard bank deposit in that it has a demand able debt-like structure. When withdrawals are unusually high, however,depositors who withdraw relatively late experience significant losses. This contractual arrangement can be fragile, admitting another equilibrium in which depositors run on the bank by withdrawing funds regardless of their liquidity needs. |
| JEL: | D82 G01 G21 |
| Date: | 2015–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:15-06&r=cta |
| By: | Ole Peters; Alexander Adamou |
| Abstract: | We present a mathematical solution to the insurance puzzle. Our solution only uses time-average growth rates and makes no reference to risk preferences. The insurance puzzle is this: according to the expectation value of wealth, buying insurance is only rational at a price that makes it irrational to sell insurance. There is no price that is beneficial to both the buyer and the seller of an insurance contract. The puzzle why insurance contracts exist is traditionally resolved by appealing to utility theory, asymmetric information, or a mix of both. Here we note that the expectation value is the wrong starting point -- a legacy from the early days of probability theory. It is the wrong starting point because not even the most basic models of wealth (random walks) are stationary, and what the individual experiences over time is not the expectation value. We use the standard model of noisy exponential growth and compute time-average growth rates instead of expectation values of wealth. In this new paradigm insurance contracts exist that are beneficial for both parties. |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1507.04655&r=cta |
| By: | Timothy Guinnane (Economic Growth Center, Yale University); Susana (University of Murcia, Spain) |
| Abstract: | Economists have long neglected study of an important contractual decision, a firm’s choice of legal form. Enterprise form shapes the relations among a firm’s owners as well as many features of a firm’s interactions with the rest of the economy. Using unusual firm-level data on Spain 1886-1936, we estimate nested logit models of the determinants of enterprise form choice. In 1919, Spain introduced a new enterprise form that compromised between partnerships and corporations, and displaced larger partnerships and smaller corporations. This Sociedad de Responsabilidad Limitada was especially important for small and median-sized enterprises whose owners were not related. |
| Keywords: | Law and finance, law and economics, legal form of enterprise, Spanish economic history, limited partnership, limited-liability company |
| JEL: | K20 N43 N44 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:egc:wpaper:1049&r=cta |