nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2015‒09‒18
five papers chosen by
Guillem Roig
University of Melbourne

  1. A Complete Characterization of Equilibria in Two-type Common Agency Screening Games By Martimort, David; Semenov, Aggey; Stole, Lars
  2. Incentive Contracts for Teams: Experimental Evidence By Landeo, Claudia; Spier, Kathryn
  3. Stipulated Damages as a Rent-Extraction Mechanism: Experimental Evidence By Landeo, Claudia; Spier, Kathryn
  4. Persuasive signalling By Arianna Degan; Ming Li
  5. Estimating the marginal rate of substitution between wage and employment protection. By Berton, Fabio; Migheli Matteo

  1. By: Martimort, David; Semenov, Aggey; Stole, Lars
    Abstract: We characterize the complete set of equilibrium allocations to a two-type intrinsic common agency screening game as the set of solutions to a self-generating optimization program. The program, in turn, can be thought of as a maximization problem facing a fictional “surrogate” principal with a simple set of incentive constraints that embed the non-cooperative behavior of principals in the underlying game. After providing a complete characterization of equilibrium outcomes, we refine the set by imposing a requirement of biconjugacy on equilibrium tariffs: In biconjugate equilibria, the surrogate principal’s incentive constraints are described by marginal conditions. Biconjugate equilibria always exist, they are simple to compute, and they are robust in the sense that they remain equilibria when “out-of-equilibrium” output-price pairs are pruned. After characterizing the set of biconjugate equilibrium allocations, we ask what is the best equilibrium for the principals from an ex ante perspective. We show that the allocation that maximizes the principals’ ex ante collective payoff among all possible equilibria is distinct from the best allocation in the refined set of biconjugate equilibria, although their qualitative properties remain similar.
    Keywords: Intrinsic common agency, aggregate games, screening contracts.
    JEL: D82 D86
    Date: 2015–08–19
  2. By: Landeo, Claudia (University of Alberta, Department of Economics); Spier, Kathryn (Harvard Law School)
    Abstract: This paper reports the results of an experiment on incentive contracts for teams. The agents, whose efforts are complementary, are rewarded according to a sharing rule chosen by the principal. Depending on the sharing rule, the agents confront endogenous prisoner's dilemma or stag-hunt environments. Our main findings are as follows. First, we demonstrate that ongoing interaction among team members positively affects the principal's payoff . Greater team cooperation is successfully induced with less generous sharing rules in infinitely-repeated environments. Second, we provide evidence of the positive effects of communication on team cooperation in the absence of ongoing team interaction. Fostering communication among team members does not significantly affect the principal's payoff , suggesting that agents' communication is an imperfect substitute for ongoing team interaction. Third, we show that offering low sharing rules can back re. The agents are willing to engage in costly punishment (shirking) as retaliation for low offers from the principal. Our findings suggest that offering low sharing rules is perceived by the agents as unkind behavior and hence, triggers negative reciprocity.
    Keywords: Moral Hazard in Teams; Prisoners Dilemma; Stag-Hunt Games; Infinitely-Repeated Games; Communication; Reciprocity; Laboratory Experiments
    JEL: C72 C90 D86 K10 L23
    Date: 2015–08–25
  3. By: Landeo, Claudia (University of Alberta, Department of Economics); Spier, Kathryn (Harvard Law School)
    Abstract: This paper experimentally studies stipulated damages as a rent-extraction mechanism. We demonstrate that contract renegotiation induces the sellers to propose the lowest stipulated damages and the entrants to offer the highest price more frequently. We show that complete information about the entrant’s cost lowers exclusion of high-cost entrants. Unanticipated findings are observed. The majority of sellers make more generous offers than expected. Rent extraction also occurs in renegotiation environments. Our findings from the dictatorial seller and buyer-entrant communication treatments suggest the presence of social preferences.
    Keywords: Stipulated Damages; Rent Extraction; Market Foreclosure; Renegotiation; Social Preferences; Experiments
    JEL: C72 C91 D86 K12 K21 L42
    Date: 2015–08–29
  4. By: Arianna Degan (Université du Québec à Montréal and CIRPEE); Ming Li (Concordia University and CIREQ)
    Abstract: We present a model of persuasive signalling, where a privately-informed sender selects from a class of signals with different precision to persuade a receiver to take one of two actions, where higher precision is more costly. The sender’s information could be either favourable or unfavourable. The receiver observes both the sender’s choice of signal and a random realization of the signal. We show that all plausible equilibria must involve some pooling and any informative signal must be associated with an optimistic posterior. When the receiver is ex ante pessimistic or indifferent, the only plausible equilibrium is semi-separating, with levels of precision independent of the prior. Finally, we investigate the sender’s optimal persuasion policy–choice of signal before (commitment) or after (discretion) he learns his type. We show that the sender is indifferent between commitment and discretion when the prior is optimistic, prefers discretion to commitment when the prior is sufficiently pessimistic, and could either prefer discretion or commitment when the prior is neutral.
    Keywords: signalling, persuasion, divine equilibrium, optimal information provision.
    JEL: D72 D82
    Date: 2015–08
  5. By: Berton, Fabio; Migheli Matteo (University of Turin)
    Abstract: Empirical evidence supports the hypothesis that workers have a strong preference for job security. Building on this, the empirical research focused so far on the analysis of the “port-of-entry hypothesis” – namely on testing whether temporary jobs may act as a springboard towards standard employment relationships – underexploring the issue of what would make workers indifferent between the two options. This is the aim of the present paper. Using a dedicated survey on a random sample of workers from the Italian public employment service, we find that: i) workers actually require a monetary compensation to trade a non-standard job for a standard one; ii) moreover, they display lexicographic preferences over contracts, inasmuch as when they have to compare an open-ended contract to a freelance contract (chosen as the epitome of precariousness in Italy), the compensation they ask for does not depend on contract duration; on the opposite, when they compare open-ended jobs to fixed-term jobs (where only expected duration actually matters) the required compensation does not depend on the type of contract, but only on its planned duration; iii) the estimated MRS between wage and contract duration is 257 more Euros per month to accept a one-year shorter employment relationship.
    Date: 2015–07

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