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on Contract Theory and Applications |
| By: | Yeon-Koo Che (Department of Economics, Columbia University); Elisabetta Iossa (DEF and CEIS,University of Rome Tor Vergata, CEPR, IEFE-Bocconi and EIEF); Patrick Rey (Toulouse School of Economics, GREMAQ, IDEI and CEPR) |
| Abstract: | The procurement of an innovation involves motivating a research effort to generate a new idea and then implementing that idea efficiently. If research efforts are unverifiable and implementation costs are private information, a trade-off arises between the two objectives. The optimal mechanism resolves the tradeoff via two instruments: a monetary prize and a contract to implement the project. The optimal mechanism favors the innovator in contract allocation when the value of innovation is above a certain threshold, and handicaps the innovator in contract allocation when the value of innovation is below that threshold. A monetary prize is employed as an additional incentive but only when the value of innovation is sufficiently high. |
| Keywords: | Contract rights, Inducement Prizes, Innovation, Procurement and R&D. |
| JEL: | D44 H57 D82 O31 O38 O39 |
| Date: | 2015–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:358&r=cta |
| By: | Gaston Llanes (Escuela de Administracion, Pontificia Universidad Catolica de Chile); Francisco Ruiz-Aliseda (Escuela de Administracion, Pontificia Universidad Catolica de Chile) |
| Abstract: | We study a two-sided market in which a platform connects consumers and sellers, and signs private contracts with sellers. We compare this situation with a two-sided market with public contracts. We find that the platform provider sets positive (negative) royalties to sellers and earns a negative (positive) markup on consumers when contracts are private (public). Thus, private contracting has a significant effect on the price structure. Private contracting leads to lower platform profits, consumer surplus, and social welfare. We study the welfare effects of most-favored-nation clauses, price-forcing contracts, and integration with sellers; and relate our results with the agency model of sales. Our results indicate that enhancing the market power of a dominant platform over sellers may increase welfare because it acts as a commitment device for inducing lower seller prices, mitigating the hold-up problem borne by consumers when they cannot observe sellers' contracts. |
| Keywords: | Two-Sided Markets; Platforms; Vertical Relations; Most-Favored Nation; Price-Forcing Contracts; Resale Price Maintenance; Integration; Agency Model of Sales |
| JEL: | L12 L14 L42 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1516&r=cta |
| By: | Yicheng Wang (University of Rochester) |
| Abstract: | Evidence suggests that financially constrained firms may offer lower wages, coupled with faster wage growth. If these constrained firms can tilt wages, cutting current wages in exchange for later increases, this potentially mitigates the impact of financial frictions or shocks. This paper studies the aggregate implications of this mitigating effect with an application to the 2008 financial crisis. I provide a new, tractable equilibrium model of wage dynamics for heterogeneous firms--some are financially constrained, some not. Risk-neutral firms post optimal long-term wage contracts to attract risk-averse workers through competitive search. When applied to the 2008 financial crisis, the model predicts that small firms, being more likely to be constrained, tend to temporarily cut workers' wages, while for large firms wages are quite smooth and stable. Counterfactual experiments in the model show that the mitigating effect can be important. For instance, if the wages within a contract were more rigid (e.g., by raising workers' risk aversion parameter from $2$ to $10$), the aggregate output would have been even lower in the crisis by about 2\% and the unemployment rate higher by about a third of a percentage point. Lastly, I find that the model has empirical support along several dimensions. The model is consistent with cyclical behavior in wage data (including new hires and job stayers' wage behavior). Its prediction that small firms cut wages much more than large firms is also consistent with micro-level data during the Great Recession. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1189&r=cta |
| By: | Rosemarie Ziedonis (University of Oregon); Carlos Serrano (Pompeu Fabra University); Yael Hochberg (MIT Sloan School of Management) |
| Abstract: | The use of debt to finance risky entrepreneurial-firm projects is rife with informational and contracting problems. Nonetheless, we document widespread lending to startups in three innovation-intensive sectors and in early stages of development. At odds with claims that the secondary patent market is too illiquid to shape debt financing, we find that intensified patent trading increases the annual rate of startup lending, particularly for startups with more redeployable (less firm-specific) patent assets. Exploiting differences in venture capital (VC) fundraising cycles and a negative capital-supply shock in early 2000, we also find that the credibility of VC commitments to refinance and grow fledgling companies is vital for such lending. Our study illuminates friction-reducing mechanisms in the market for venture lending, a surprisingly active but opaque arena for innovation financing, and tests central tenets of contract theory. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1170&r=cta |
| By: | Antonio Accetturo; Andrea Linarello; Andrea Petrella |
| Abstract: | In this paper, we study how contract enforcement at the local level affects a firm's ability to supply customised intermediate inputs to foreign firms. Using Italian firm-level data, we show that firms located in courts with higher judicial trial length in civil disputes, which is our measure of contract enforcement, are less likely to supply customised inputs to foreign firms. The effect is stronger in contact-intensive sectors. In our empirical exercise we take advantage of two important characteristics of the Italian legal system. First, law determines the courts for disputes. This corresponds to the court where the plant is located. Trial length varies from less than one year in the most efficient court to more than seven years in the least efficient one. We observe large heterogeneity despite the fact that law should be uniformly applied over the country. Second, the Italian law codifies a specific contract type for the supply of customised intermediate inputs (contratto di subfornitura). This contract is widely used in the Italian context (Lazerson, 1999). In our data, firms report if they supply intermediate inputs to foreign customers under this type of contract. We deem it to be a very good approximation of the firm-to-firms relations in a Global value chain. We find that, when firms are located in inefficient courts, the probability to supply intermediate inputs abroad decreases. The effect are stronger for firms that operate in industries that are contract intensive. Following Nunn (2007), for each industry we measure contract intensity as the share of products that are not sold on organised markets according to the Rauch (1999) classification. We find that a standard deviation increase in trial length decreases the probability to supply customised inputs by 1.7 to 3 percentage points in industries at the 25th and 75th percentile of contract intensity, respectively. |
| Keywords: | Local institutions; global value chains; local competitiveness |
| JEL: | F10 F14 L14 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa15p439&r=cta |