nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2015‒10‒04
four papers chosen by
Guillem Roig
University of Melbourne

  1. “Strong versus Weak Vertical Integration: Contractual Choice and PPPs in the United States” By Daniel Albalate; Germà Bel; Richard R. Geddes
  2. Internalizing Global Value Chains: A Firm-Level Analysis By Laura Alfaro; Pol Antràs; Davin Chor; Paola Conconi
  3. Mobile Politicians: Opportunistic Career Moves and Moral Hazard By Duha T. Altindag; Naci Mocan
  4. Sovereign Debt Renegotiation and Credit Default Swaps By Juliana Salomao

  1. By: Daniel Albalate (Faculty of Economics, University of Barcelona); Germà Bel (Faculty of Economics, University of Barcelona); Richard R. Geddes (College of Human Ecology,Cornell University)
    Abstract: Public-Private-Partnerships are long-term, relational contracts between a public-sector sponsor and a private partner to deliver infrastructure projects across a range of economic sectors. Efficiency gains may derive from risk transfer and bundling different tasks within a single contract. We study the factors explaining the scope of bundling. We focus on the choice between weak vertical integration, which includes operational tasks alone or construction tasks alone, versus strong vertical integration, which involves the combination of operational and construction tasks. We utilize a new data set that includes 553 PPPs concluded in the U.S. between 1985 and 2013.
    Keywords: Privatization, Public–Private Partnerships, Contracting, Vertical Integration JEL classification: L14; L33; L51; L88
    Date: 2015–09
  2. By: Laura Alfaro; Pol Antràs; Davin Chor; Paola Conconi
    Abstract: In recent decades, technological progress in information and communication technology and falling trade barriers have led firms to retain within their boundaries and in their domestic economies only a subset of their production stages. A key decision facing firms worldwide is the extent of control to exert over the different segments of their production processes. Building on Antràs and Chor (2013), we describe a property-rights model of firm boundary choices along the value chain. To assess the evidence, we construct firm-level measures of the upstreamness of integrated and non-integrated inputs by combining information on the production activities of firms operating in more than 100 countries with Input-Output tables. In line with the model's predictions, we find that whether a firm integrates upstream or downstream suppliers depends crucially on the elasticity of demand for its final product. Moreover, a firm's propensity to integrate a given stage of the value chain is shaped by the relative contractibility of the stages located upstream versus downstream from that stage. Our results suggest that contractual frictions play an important role in shaping the integration choices of firms around the world.
    JEL: D23 F14 F23 L20
    Date: 2015–09
  3. By: Duha T. Altindag (Auburn University); Naci Mocan (Louisiana State University, NBER and IZA)
    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.
    Date: 2015–09
  4. By: Juliana Salomao (University of Minnesota)
    Abstract: A credit default swap (CDS) contract provides insurance against default. After a country defaults, the country and its lenders usually negotiate over the share of the defaulted debt to be repaid. This paper incorporates CDS contracts into a sovereign default model and demonstrates that the existence of a CDS market results in lower default probability, higher debt levels, and lower financing costs for the country. Since the CDS payout is not automatically triggered by losses from renegotiations, the lender needs to be compensated for lower expected insurance payments. This leads to higher debt repayment in renegotiation, decreasing the benefits of defaulting, and hence allowing the country to borrow more at lower rates. Uncertainty over the insurance payout when the debt is renegotiated explains why in the data, as the output declines, the CDS spread becomes lower than the bond spread. Furthermore, this pricing dynamic during a debt crisis can be used to infer market perceptions of the probability of the CDS paying out after a renegotiation. The model is calibrated to Greek data and shows that increasing CDS levels from 0 to 5% of debt lowers the unconditional default probability from 2.6% to 2.0% per year with no impact on debt level. Further increasing the CDS to 40% of debt increases the equilibrium debt level by 15%, but also increases the probability of default to 3.1%.
    Date: 2015

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