nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2015‒08‒30
five papers chosen by
Guillem Roig
University of Melbourne

  1. Efficiency and Information Transmission in Bilateral Trading By Robert Shimer; Iván Werning
  2. Multiproduct Monopoly Made Simple By Mark Armstrong; John Vickers
  3. Aggregate Consequences of Dynamic Credit Relationships By Verani, Stephane
  4. Contracting on Networks By Mohamed Belhaj; Frédéric Deroïan
  5. Relational contracts and supplier turnover in the global economy By Defever, Fabrice; Fischer, Christian; Suedekum, Jens

  1. By: Robert Shimer; Iván Werning
    Abstract: We study pairwise trading mechanisms in the presence of private information and limited commitment, whereby either trader can walk away from a proposed trade when he learns the trading price. We show that when one trader's information is relevant for the other trader's value of the asset, optimal trading arrangements may necessarily conceal the traders' information. While limited commitment itself may not be costly, it shapes how prices transmit information.
    JEL: D82 D83 G14
    Date: 2015–08
  2. By: Mark Armstrong; John Vickers
    Abstract: We present a tractable class of multiproduct monopoly models that involve a generalized form of homothetic preferences. This class includes CES, linear and logit demand. Within the class, profit-maximizing quantities are proportional to efficient quantities. We discuss cost-passthrough, including cases where optimal prices do not depend on other products’costs. We show how the analysis can be extended to Cournot oligopoly. Finally, we discuss optimal monopoly regulation when the firm has private information about its vector of marginal costs, and show that if the probability distribution over costs satisfies an independence property, then optimal regulation leaves relative price decisions to the firm.
    Keywords: Multiproduct pricing, homothetic preferences, cost passthrough, monopoly regulation, multidimensional screening.
    JEL: D42 D82 L12 L51
    Date: 2015–08–20
  3. By: Verani, Stephane (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Which financial frictions matter in the aggregate? This paper presents a general equilibrium model in which entrepreneurs finance a firm with a long-term contract. The contract is constrained efficient because firm revenue is costly to monitor and entrepreneurs may default. The cost of monitoring firms and the entrepreneurs' outside options determine the significance of moral hazard relative to limited enforcement for financial contracting. Calibrating the model to the U.S. economy, I find that the relative welfare loss from financial frictions is about 5 percent in terms of aggregate consumption with moral hazard, while it is 1 percent with limited enforcement. Reforms designed to strengthen contract enforcement increase aggregate consumption in the short-run, but their long-run effects are modest when monitoring costs are high. Weak contract enforcement contributes to aggregate fluctuations by amplifying the effect of aggregate technological shocks, but moral hazard does not.
    Keywords: Business cycles; financial contracting; financial development; firm dynamics; limited enforcement; private information
    JEL: D82 E32 G32 L14
    Date: 2015–08–14
  4. By: Mohamed Belhaj (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université); Frédéric Deroïan (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université)
    Abstract: A principal offers bilateral contracts to a set of agents organized in a network conveying synergies, in a context where agents' efforts are observable and where the principal's objective increases with the sum of efforts. We characterize optimal contracts as a function of agents' positions on the network. The analysis shows that contract enforceability is key to understand optimality. We also examine linear contracting and we analyze the situation where the principal is constrained to contract with a single agent on the network. Last, we extend this setting to network entry.
    Date: 2015–01
  5. By: Defever, Fabrice; Fischer, Christian; Suedekum, Jens
    Abstract: Headquarters and their specialized component suppliers have a vital interest in establishing long-term collaborations. When formal contracts are not enforceable, such efficiency-enhancing cooperations can be established via informal agreements, but relational contracts have been largely ignored in the literature on the international organization of value chains. In this paper, we develop a dynamic property rights model of global sourcing. A domestic headquarter collaborates with a foreign input supplier and makes two decisions in every period: i) whether to engage in a costly search for a better partner, and ii) whether to make a non-binding offer to overcome hold-up problems. Our key result is that the possibility to switch partners crucially affects the contractual nature of buyer-supplier relationships. In particular, some patient firms do not immediately establish a relational contract, but only when they decide to stop searching and thus launch a long-term collaboration with their supplier. From our model, we develop an instrumental variable estimation strategy that we apply using transaction-level data of fresh Chinese exporters to the US. We obtain empirical evidence in line with the theoretical prediction of a positive causal effect of match durations on relational contracting.
    Keywords: firm organization,input sourcing,relational contracts,supplier search,processing trade,China
    JEL: D23 L23 F23
    Date: 2015

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