nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2015‒08‒25
seven papers chosen by
Guillem Roig
University of Melbourne

  1. A Reputational Theory of Firm Dynamics By Moritz Meyer-ter-Vehn; Simon Board
  2. Research and Development of an Optimally Regulated Monopolist with Unknown Costs By Ismail Saglam
  3. A mechanism design approach to the Tiebout hypothesis By Jehiel, Philippe; Lamy, Laurent
  4. Asymmetric Information and Middleman Margins: An Experiment with Indian Potato Farmers By Sandip Mitra; Dilip Mookherjee; Maximo Torero; Sujata Visaria
  5. Mobile Politicians: Opportunistic Career Moves and Moral Hazard By Duha T. Altindag; Naci Mocan
  6. Identification of Insurance Models with Multidimensional Screening By Gaurab Aryal; Isabelle Perrigne; Quang Vuong
  7. Competition and Relational Contracts: Evidence from Rwanda's Coffee Mills By Rocco Macchiavello; Ameet Morjaria

  1. By: Moritz Meyer-ter-Vehn (UCLA); Simon Board (University of California - Los Angeles)
    Abstract: We propose a firm lifecycle model in which the firm privately invests in its quality and thereby its reputation. Over time, both the firm and the market learn about the firm's evolving quality via infrequent breakthroughs. The firm can also exit if its value becomes negative, giving rise to selection effects. In a pure-strategy equilibrium, incentives are single-peaked: the firm shirks immediately following a breakthrough, works for intermediate levels of reputation and shirks again when it is about to exit. This investment behavior yields predictions for the distribution of firm productivity and the survival rate. Finally, we compare the model to two variants: one in which the firm's investment is publicly observed, and a second in which the firm has private information about its product quality.
    Date: 2015
  2. By: Ismail Saglam (Department of Economics, Ipek University)
    Abstract: This paper studies whether a monopolist with private marginal cost information has incentives to make cost-reducing innovations through research and development (R&D) when its output and price are regulated according to the incentive-compatible mechanism of Baron and Myerson (1982). Under several assumptions concerning the cost of R&D and the regulator's beliefs about the marginal cost, we characterize the optimal level of R&D activities for the regulated monopolist when these activities are observed by the regulator as well as when they are not. We show that the regulated monopolist always chooses a higher level of R&D activities when its activities are unobserved. In situations where the social welfare attaches a sufficiently high weight to the monopolist welfare, the monopolist's R&D activities in the unobservable case even realize at a higher level than its activities when its output and price are not regulated. Moreover, whenever R&D activities increase productive efficiency, a less efficient monopolist would choose a higher level of R&D activities than a more efficient monopolist, irrespective of the observability of R&D.
    Keywords: Monopoly, Regulation,Research and Development
    JEL: D82 L51 O32
    Date: 2015–07
  3. By: Jehiel, Philippe; Lamy, Laurent
    Abstract: We revisit the Tiebout hypothesis in a world in which agents may possess private information as to how they value the various public goods in the various locations, and jurisdictions are free to choose whatever mechanism to attract citizens possibly after making some investments. It is shown that efficiency can be achieved as a competitive equilibrium when jurisdictions seek to maximize local revenues but not necessarily when they seek to maximize local welfare. Limitations of the result are discussed.
    Keywords: competing exchange platforms; competing mechanisms; endogenous entry; free riding; local public goods; mechanism design; Tiebout hypothesis
    JEL: D82 H4
    Date: 2015–08
  4. By: Sandip Mitra (Sampling and Ocial Statistics Unit, Indian Statistical Institute); Dilip Mookherjee (Department of Economics, Boston University); Maximo Torero (International Food Policy Research Institute); Sujata Visaria (Department of Economics, Hong Kong University of Science and Technology; Institute for Emerging Market Studies, Hong Kong University of Science and Technology)
    Abstract: In the Indian state of West Bengal, potato farmers sell to local middlemen because they lack direct access to wholesale markets. In high-frequency farmer marketing surveys we find that farmers are poorly informed about wholesale and retail prices, and there is a large gap between wholesale and farmgate prices. To test alternative models of farmer-middlemen trades, we conduct a field experiment providing farmers in randomly chosen villages with market price information. Information provision had negligible average effects on farmgate sales and revenues, but increased pass-through from wholesale to farmgate prices. The results are inconsistent with models of risk-sharing via contracts between middlemen and farmers. They are consistent with a model of ex post bargaining and sequential price competition between a cartel of village middlemen and a cartel of external middlemen.
    Keywords: agricultural finance, agent based lending, group lending, selection, repayment
    JEL: O12 L14
    Date: 2015–08
  5. By: Duha T. Altindag; Naci Mocan
    Abstract: We exploit the randomness generated by a seat allocation mechanism utilized in Parliamentary elections that determines those politicians who get elected from a given district by a small margin, and those who lose. Using detailed information on personal attributes of more than 2,000 elected Members of the Parliament (MPs) and the votes received by each political party in every district and each of the five consecutive Parliamentary elections in Turkey between 1991 and 2011, we show that elected MPs are more likely to switch parties after an election if they faced electoral uncertainty and experienced a narrowly-won victory. The tendency to switch parties goes up as it becomes more lucrative to hold the post of MP. The impact of election uncertainty on party-switching is greater for younger MPs, and for those who are less educated. The propensity to switch due to uncertainty is higher if the MP is a member of the governing party, but only if the seat is valuable (if the majority of the party in the Parliament is slim). Politicians switch parties after an election to improve their ex-ante re-election probability in the following election. Although switching parties during a legislative session (between elections) for personal career concerns creates moral hazard, we find that party-switching MPs are more likely to get elected in the next election. These results point to forward-looking opportunistic behavior of politicians regarding their strategy to win future elections, and they indicate that politicians switch parties primarily for career concerns and for financial benefits that are associated with longer tenure in the Parliament. The results also signify that competition between political parties continues after the election, in the form of gaining seats in the Parliament post- election by transferring elected representatives of competing parties. This constitutes another dimension of the political agency problem.
    JEL: D72 K0
    Date: 2015–07
  6. By: Gaurab Aryal; Isabelle Perrigne; Quang Vuong
    Abstract: This paper addresses the identification of insurance models with multidimensional screening where insurees have private information about their risk and risk aversion. The model also includes a random damage and the possibility of several claims. Screening of insurees relies on their certainty equivalence. The paper then investigates how data availability on the number of offered coverages and reported claims affects the identification of the model primitives under four different scenarios.We show that the model structure is identified despite bunching due to multidimensional screening and/or a finite number of offered coverages. The observed number of claims plays a key role in the identification of the joint distribution of risk and risk aversion. In addition, the paper derives all the restrictions imposed by the model on observables. Our results are constructive with explicit equations for estimation and model testing.
    Date: 2015–08
  7. By: Rocco Macchiavello (Warwick University); Ameet Morjaria (Harvard University)
    Abstract: Business transactions often occur in the absence of enforceable contracts. To sustain trade in such cases, parties rely on relational contracts (RC). Introducing competition might change exit options, thus undermining the ability to sustain RC. To examine the impact of competition in procurement of inputs, we exploit the prevalence of RC between processing mills and farmers in Rwanda's coffee sector. We implement a census of all mills and farmers to capture the features of the RC binding them. We then develop a RC model to capture the incentive problems between mills and farmers. The model is used to predict how competition affects RC, the mill's performance, and farmer outcomes. Since the location of mills is endogenous, an engineering model is estimated for the optimal placement of mills to instrument for competition in each locality. We find that competition between mills undermines RC by increasing the mill's processing costs, lowering the mill's capacity utilization and reducing the quality of coffee cherries received by the mill. Competition constraints the farmer's credit and input choices and reduces farmer's wellbeing. The findings highlight that in weak contracting settings, the value RC generates can be hampered by competition. The evidence provides a rationale for policies commonly observed historically across developing countries, such as zoning regulations and monopsony licensing, and emphasizes the importance of promoting contractual enforcement in agricultural value chains in order to reap the benefits of competition.
    Date: 2015

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