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on Contract Theory and Applications |
| By: | Rodrigo Montes (Toulouse School of Economics); Wilfried Sand-Zantman (Toulouse School of Economics and ESSEC Business School); Tommaso Valletti (Imperial College London, DEF and CEIS, Università di Roma "Tor Vergata" & CEPR) |
| 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 inefficiencies, and we show that policy makers should concentrate their attention on exclusivity deals rather than making it easier for consumers to protect their privacy. |
| Date: | 2015–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:352&r=cta |
| By: | Özlem Bedre-Defolie (ESMT European School of Management and Technology); Gary Biglaiser (University of North Carolina) |
| Abstract: | We analyze whether the use of breakup fees by an incumbent might induce an inefficient allocation of consumers and possibly foreclose efficient entry where buyers are non-pivotal (infinitesimal) and have to pay switching costs if they switch from the incumbent to an entrant. When the entrants are competitive, in the unique equilibrium the incumbent induces the efficient outcome, so there is no inefficient foreclosure. When there is a single entrant, the incumbent cannot deter the entry if it is not allowed to use a breakup fee. In the equilibrium of this case there might be too much or too little entry depending on the entrant's cost advantage versus the highest level of switching costs. When the incumbent can use a breakup fee in its long-term contract, in the unique equilibrium the incumbent forecloses the entrant by a sufficiently high breakup fee. This result does not depend on the level of switching costs or the entrant's efficiency advantage. We extend the result to a situation where consumers do not face switching costs, but they get a lower match value from the entrant's product than the incumbent's. In this case the results differ only when there is a single entrant. There are no inter temporal effects without breakup fees and if the incumbent is allowed to use breakup fees, it forecloses the entrant if and only if the entrant's cost advantage is sufficiently low compared to the highest switching cost. All results are robust to allowing the incumbent to offer a spot price. |
| Date: | 2015–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:esm:wpaper:esmt-15-02&r=cta |
| By: | Kiho Yoon (Department of Economics, Korea University, Seoul, Republic of Korea) |
| Abstract: | This paper defines the class of dynamic Groves mechanisms, and shows that (i) a dynamic Groves mechanism is outcome efficient and periodic ex-post incentive compatible, and (ii) any dynamic direct mechanism which is outcome efficient and periodic ex-post incentive compatible is a dynamic Groves mechanism when the domain of valuations is sufficiently rich. |
| Keywords: | Groves mechanism, dynamic mechanism design, ex-post incentive compatibility, outcome efficiency |
| JEL: | C73 D82 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:iek:wpaper:1505&r=cta |
| By: | Roland Strausz; ; ; |
| Abstract: | Crowdfunding challenges the traditional separation between nance and marketing. It creates economic value by reducing demand uncertainty, which enables a better screening of positive NPV projects. Entrepreneurial moral hazard threatens this eect. Using mechanism design, mechanisms are characterized that induce ecient screening, while preventing moral hazard. \All-ornothing" reward-crowdfunding platforms re ect salient features of these mechanisms. Eciency is sustainable only if expected gross returns exceed twice expected investment costs. Constrained ecient mechanisms exhibit underinvestment. With limited consumer reach, crowdfunders become actual investors. Crowdfunding complements rather than substitutes traditional entrepreneurial nancing, because each nancing mode displays a dierent strength. |
| Keywords: | Crowdfunding, nance, marketing, demand uncertainty, moral hazard |
| JEL: | D82 G32 L11 M31 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2015-036&r=cta |
| By: | Shota Otomasa (Kansai University); Atsushi Shiiba (Osaka University); Akinobu Shuto (The University of Tokyo) |
| Abstract: | This paper investigates whether and how Japanese firms use management earnings forecasts as a performance target for determining executive cash compensation. Consistent with the implications of the principal?agent theory, we find that the sensitivity of executive cash compensation varies with the extent to which realized earnings exceed initial management forecasts. In particular, we find that, for a sample of Japanese firms comprising 14,899 firm-year observations from 2005 to 2012, the executive cash compensation is positively related to management forecast error (MFE). Moreover, we show that the relationship between executive cash compensation and MFE strengthens when realizing positive MFEs despite aggressive initial forecasts. Overall, we find that initial management forecasts can be used as a performance target in executive compensation contracts. These findings also suggest that management earnings forecasts are important for improving contract efficiency as well as for providing useful information to investors in the capital market. |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf368&r=cta |
| By: | Marco Fongoni (Department of Economics, University of Strathyclyde); Alex Dickson (Department of Economics, University of Strathyclyde) |
| Abstract: | Concerns for fairness, workers' morale and reciprocity influence firms' wage setting policy. In this paper we formalize a theory of wage setting behavior in a simple and tractable model that explicitly considers these behavioral aspects. A worker is assumed to have reference-dependent preferences and displays loss aversion when evaluating the fairness of a wage contract. The theory establishes a wage-effort relationship that captures the worker's reference-dependent reciprocity, which in turn influences the firm's optimal wage policy. The paper makes two key contributions: it identifies loss aversion as an explanation for a worker's asymmetric reciprocity; and it provides realistic and generalized microfoundation for downward wage rigidity. We further illustrate the implications of our theory for both wage setting and hiring behavior. Downward wage rigidity generates several implications for the outcome of the initial employment contract. The worker's reference wage, his extent of negative reciprocity and the firms’ expectations are key drivers of the propositions derived. |
| Keywords: | reference dependence, loss aversion, morale, reciprocity, employment contract, downward wage rigidity, wage setting behavior |
| JEL: | C78 J30 J41 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:str:wpaper:1505&r=cta |
| By: | Maria Breitwieser (Department of Economics, GSDS, University of Konstanz, Germany) |
| Abstract: | The presented paper offers a simple search model of the labor market to explain the empirical findings on the role of reciprocity for labor market outcomes as reported by Dohmen et al. (2009). In an agency setting where profit-maximizing firms compete for heterogeneous reciprocal workers, with full information about workers’ types, reciprocal workers who are willing to engage in gift exchange are approached by more firms, get higher wages and exert higher efforts than selfish workers. |
| Keywords: | reciprocity, gift exchange, competitive search equilibrium, optimal contracts, wage differentials, unemployment |
| JEL: | D03 D21 E24 J31 J64 |
| Date: | 2015–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1516&r=cta |
| By: | Kukharskyy, Bohdan |
| Abstract: | Relational contracts - informal agreements sustained by the value of future relationships - are integral parts of global production processes. This paper develops a repeated-game model of global sourcing in which final goods producers decide whether to engage with their suppliers in relational contracting and whether to integrate a supplier into a firm's boundaries or deal with the latter at arm's length. The model predicts that the likelihood of vertical integration increases in the long-term orientation of cooperation parties. Combining data from the U.S. Census Bureau's Related Party Trade database with measures for long-term orientation from Hofstede et al. (2010) and World Values Survey, I find empirical evidence supportive of this paper's key prediction. To better understand if the relationship is causal, I apply instrumental variables approach using genetic proxies and inherited components of long-term orientation as instruments. Taken together, the evidence suggests that the level of long-term orientation of the home and host country has a positive effect on the relative prevalence of vertical integration. |
| Keywords: | relational contracts,long-term orientation,international make-or-buy decision |
| JEL: | D02 D23 F14 F23 L22 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuewef:83&r=cta |