nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2015‒10‒17
seven papers chosen by
Guillem Roig
University of Melbourne

  1. Relational Contracts and Supplier Turnover in the Global Economy By Fabrice Defever; Christian Fischer; Jens Suedekum
  2. To friends everything, to strangers the law? An experiment on contract enforcement and group identity By Marian Panganiban
  3. On the Observational Equivalence of Unilateral Delegation Contracts in Duopoly By F. Delbono; L. Lambertini
  4. Equilibria for Multi–leader Multi–follower Games with Vertical Information: Existence Results By Maria Carmela Ceparano; Jacqueline Morgan
  5. On vertical relations and the timing of technology adoption By Alipranti, Maria; Milliou, Chrysovalantou; Petrakis, Emmanuel
  6. Bancarizing with Credit Cards: Experimental Evidence on Interest Rates and Minimum Payments Elasticities for New Clients By Seira Enrique; Castellanos Pascacio Sara Gabriela; Jiménez Hernández Diego J.
  7. Economic Institutions and the Location Strategies of European Multinationals in their Geographical Neighbourhood By Andrea Ascani; Riccardo Crescenzi; Simona Iammarino

  1. By: Fabrice Defever; Christian Fischer; Jens Suedekum
    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: 2015–10
  2. By: Marian Panganiban (Max Planck Institute for Research on Collective Goods, Bonn, and Friedrich-Schiller-Universität, Jena)
    Abstract: Although the role of formal and informal institutions in promoting economic growth and sustaining exchange relations is now well established, explaining and differentiating how informal and formal rules affect individual behavior remain a challenge. This study aims to distill the essential characteristics of formal and informal institutions and disentangle their effects on trust and performance in exchange relations through a laboratory experiment. Formal institutions are modeled as third-party contract enforcement while informal institutions are represented as shared group identity. Results show that trust choices increase as contract enforcement increases but are not affected by shared group identity. However, performance is more likely to occur in interactions with in-group members than out-group members.
    Keywords: institutions, exchange relations, contract enforcement, group identity, laboratory experiments
    JEL: C72 C91 D03 D81
    Date: 2015–10–09
  3. By: F. Delbono; L. Lambertini
    Abstract: In a Cournot duopoly, if only one firm hires a manager while the other remains entrepreneurial, the Cournot-Stackelberg equilibrium emerges, with the managerial firm as the leader. This happens under at least three different delegation schemes. We illustrate the different meachanisms driving this outcome through the analysis of the map of best replies at the market stage.
    JEL: D43 L13 L21
    Date: 2015–10
  4. By: Maria Carmela Ceparano (Università di Napoli Federico II); Jacqueline Morgan (Università di Napoli Federico II and CSEF)
    Abstract: We consider a two–stage multi–leader multi–follower game where the action chosen by any leader is observed by only one “exclusive” follower. Many real–world situations can be modeled as such a game, for example in Pagnozzi and Piccolo, Vertical Separation with Private Contracts, The Economic Journal (2012), where competing manufacturers (the leaders) delegate retail decisions to exclusive retailers (the followers) offering a private contract. This game, called with vertical information, may have an infinity of Nash equilibria but it is not possible to refine using the concept of subgame perfect Nash equilibrium since the associate extensive form has no proper subgames. This motivates the introduction of selections of Nash equilibria based on the beliefs that each follower has about the actions observed by the other followers. In this paper, focusing on the concept of equilibrium under passive beliefs for a general model, we show the effectiveness of the concept and we investigate the existence of such a selection for significative classes of problems satisfying conditions of minimal character on possibly discontinuous data.
    Keywords: multi–leader multi–follower games; selection of equilibria; passive beliefs; existence; discontinuous data; information; fixed points; set–valued map
    Date: 2015–10–13
  5. By: Alipranti, Maria; Milliou, Chrysovalantou; Petrakis, Emmanuel
    Abstract: We study the timing of new technology adoption in markets with input outsourcing, and thus with vertical relations. We find that technology adoption can take place earlier when firms engage in input outsourcing than when they produce the input in-house. Hence, the presence of vertical relations can accelerate the adoption of a new technology. We also find that particular features of a vertically related market, such as the bargaining power distribution and the contract type through which trading is conducted, can crucially affect the speed of technology adoption.
    Keywords: technology adoption,vertical relations,outsourcing,two-part tariffs,wholesale price contracts,bargaining
    JEL: L13 O31 L22 L41
    Date: 2015
  6. By: Seira Enrique; Castellanos Pascacio Sara Gabriela; Jiménez Hernández Diego J.
    Abstract: We study the bancarization of marginal borrowers using credit cards and document that this process is difficult: default risk is substantial, returns heterogeneous, and account closings common. We also take advantage of a randomized control trial that varied interest rates and minimum payments in a very wide range. Against our hypothesis, we find that default risk is very insensitive to (randomized) large changes in interest rates and minimum payments. This could imply that regulating these contract terms may not necessarily "protect" consumers against default and that moral hazard in this market is negligible on average.
    Keywords: Credit cards; Development finance; Consumer behavior; Mexico.
    JEL: D14 D18 D82 G21
    Date: 2015–06
  7. By: Andrea Ascani; Riccardo Crescenzi; Simona Iammarino
    Abstract: This paper investigates how the location behaviour of Multinational Enterprises (MNEs) is shaped by the economic institutions of the host countries. The analysis covers a wide set of geographically proximate economies with different degrees of integration with the ‘Old’ 15 European Union (EU) members: New Member States, Accession and Candidate Countries, as well as European Neighbourhood Policy (ENP) countries and the Russian Federation. The paper aims to shed new light on the heterogeneity of MNE preferences for the host countries’ regulatory settings (including labour market and business regulation), legal aspects (i.e. protection of property rights and contract enforcement) and the weight of the government in the economy. By employing data on 6,888 greenfield investment projects, the randomcoefficient Mixed Logit analysis here applied shows that, while the quality of the national institutional framework is generally beneficial for the attraction of foreign investment, MNEs preferences over economic institutions are highly heterogeneous across sectors and business functions.
    Keywords: Multinational Enterprises, Economic Institutions, Location Choice, European Union
    JEL: F23 P33 L20 R30
    Date: 2015–07

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