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on Contract Theory and Applications |
| By: | Iossa, Elisabetta; Martimort, David |
| Abstract: | We analyze risk allocation and contractual choices when public procurement is plagued with moral hazard, private information on exogenous shocks, and threat of corruption. Complete contracts entail state-contingent clauses that compensate the contractor for shocks unrelated to his own effort. By improving insurance, those contracts reduce the agency cost of moral hazard. When the contractor has private information on revenues shocks, verifying messages on shocks realizations is costly. Incomplete contracts do not specify state-contingent clauses, thereby saving on verifiability costs. This makes incomplete contracts attractive even though they entail greater agency costs. Because of private information on contracting costs, a public official may have discretion to choose whether to procure under a complete or an incomplete contract. When the public official is corrupt, such delegation results in incomplete contracts being chosen too often. Empirical predictions on the use of incomplete contracts and policy implications on the benefits of standardized contracts are discussed. |
| Keywords: | corruption; incomplete contracts; moral hazard; principal-agent-supervisor model; public-private partnerships; risk allocation |
| JEL: | D23 D82 K42 L33 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10925&r=cta |
| By: | Jakub Kastl (Princeton University); Marco Pagnozzi (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università Cattolica del Sacro Cuore di Milano and CSEF) |
| Abstract: | A monopolistic information provider sells an informative experiment to a large number of perfectly competitive firms. Within each firm, a principal contracts with an exclusive agent who is privately informed about his production cost. Principals decide whether to acquire the experiment, that is informative about the agent’s production cost. While more accurate information reduces agency costs and allows firms to increase production, it also results in a lower market price, which reduces principals’ willingness to pay for information. We show that, even if information is costless for the provider, the optimal experiment is not fully informative when demand is price-inelastic and agents are likely to be inefficient. This result hinges on the assumption that firms are competitive and exacerbates when principals can coordinate vis-à-vis the information provider. In an imperfectly competitive information market, providers may restrict information by not selling the experiment to some of the principals. |
| Keywords: | Adverse Selection, Information Acquisition, Experiments, Competitive Markets |
| JEL: | D40 D82 D83 L11 |
| Date: | 2015–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:420&r=cta |
| By: | Andrew Glover (University of Texas at Austin); Dean Corbae (University of Wisconsin) |
| Abstract: | We study a dynamic model of unsecured credit markets with adverse selection and an endogenous signal of a borrower's riskiness (modeled as a credit score). Credit contracts are statically constrained efficient in our environment, which is achieved by limiting the debt of low-risk borrowers while subsidizing the interest rate for the high-risk borrowers. A higher credit score (i.e. higher prior that the borrower is low risk) relaxes the constraint on low-risk borrowers and increases the subsidization for high-risk, which means that utility for both types increases with their credit scores. We calibrate the model to salient features of the unsecured credit market and consider the welfare consequences of different information regimes. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1265&r=cta |
| By: | Fabio Galeotti (University of Lyon); Maria Montero (Department of Economics, University of Nottingham); Anders Poulsen (Department of Economics, University of East Anglia) |
| Abstract: | We report experimental data from bargaining situations where bargainers can make proposals as often and whenever they want, and can communicate via written messages. We vary the set of feasible contracts, thereby allowing us to assess the focality of three properties of bargaining outcomes: equality, Pareto efficiency, and total earnings maximization. Our main findings are that subjects avoid an equal earnings contract if it is Pareto inefficient; a large proportion of bargaining pairs avoid equal and Pareto efficient contracts in favor of unequal and total earnings maximizing contracts, and this proportion increases when unequal contracts offer larger earnings to one of the players, even though this implies higher inequality. Finally, observed behavior violates the Independence of Irrelevant Alternatives axiom, a result we attribute to a ‘compromise effect’. |
| Keywords: | bargaining, efficiency, equality, communication, experiment, independence of irrelevant alternatives |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2015-18&r=cta |
| By: | Johannes Boehm (Département d'économie) |
| Abstract: | Legal institutions affect economic outcomes, but how much? This paper documents how costly supplier contract enforcement shapes form boundaries, and quantifies the impact of this transaction cost on aggregate productivity and welfare. I embed a contracting game between a buyer and a supplier in a general-equilibrium closed-economy Eaton-Kortum-type model. Contract enforcement costs lead suppliers to underproduce. Thus, firms will perform more of the production process in-house instead of outsourcing it. On a macroeconomic scale, in countries with slow and costly courts, firms should buy relatively less inputs from sectors whose products are more specific to the buyer-seller relationship. I first present reduced-form evidence for this hypothesis using cross-country regressions. I use microdata on case law from the United States to construct a new measure of relationship-specificity by sector-pairs. This allows me to control for productivity differences across countries and sectors and to identify the effect of contracting frictions on industry structure. I then proceed to structurally estimate the key parameters of my macro-model. Using a set of counterfactual experiments, I investigate the role of contracting frictions in shaping productivity and income per capita across countries. Setting enforcement costs to US levels would increase real income by an average of 7.5 percent across all countries, and by an average of 15.3 percent across low-income countries. Hence, transaction costs and the determinants of firm boundaries are important for countries' aggregate level of development. |
| Keywords: | Contract enforcement costs; Contracting frictions; Transaction costs; Outsourcing; Aggregate productivity |
| JEL: | D23 F11 O43 L22 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/185h5h2nvv9lqr7nmeddt9uu5l&r=cta |