nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2016‒01‒03
six papers chosen by
Guillem Roig
University of Melbourne

  1. Pay Schemes, Bargaining, and Competition for Talent By Lindbeck, Assar; Weibull, Jörgen
  2. Hidden Action and Outcome Contractibility: An Experimental Test of Contract Theory By Hoppe, Eva I; Schmitz, Patrick W
  3. Asymmetric information allocation to avoid coordination failure By MORIYA, Fumitoshi; YAMASHITA, Takuro
  4. Bargaining in the Absence of Property Rights: An Experiment By Oren Bar-Gill; Christoph Engel
  5. Risk sharing mitigates opportunism in vertical contracting By Lømo, Teis Lunde
  6. Coordination of Inventions and Innovations through patent markets with prices By Ullberg, Eskil

  1. By: Lindbeck, Assar (Research Institute of Industrial Economics (IFN)); Weibull, Jörgen (Department of Economics)
    Abstract: The paper provides a framework for analysis of remuneration to agents whose task is to make well-informed decisions on behalf of a principal, with managers in large corporations as the most prominent example. The principal and agent initially bargain over the pay scheme to the latter. The bargaining outcome depends both on competition for agents and on the relative bargaining power of the two parties, given their outside options, thus allowing for the possibility that the agent may be the current CEO who may have considerable power. Having signed a contract, the agent chooses how much effort to make to acquire information about the project at hand. This information is private and the agent uses it in his subsequent decision whether or not to invest in a given project. In model A the agent’s effort to acquire information is exogenous, whereas in model E it is endogenous. Model A lends no support for other payment schemes than flat salaries is weak. Model E contains a double moral hazard problem; how much information to acquire and what investment decision to make. As a consequence, the equilibrium contracts in model E involve both bonuses and penalties. We identify lower and upper bounds on these, and study how the bonus and bonus rate depend on competition and bargaining power. We also analyze the nature of contracts when the agent is overconfident.
    Keywords: Principal-agent; Investment; Endogenous uncertainty; Contract; Bonus; Penalty
    JEL: D01 D82 D86 G11 G23 G30
    Date: 2015–12–21
  2. By: Hoppe, Eva I; Schmitz, Patrick W
    Abstract: We present the first large-scale laboratory experiment designed to capture the canonical hidden action problem as studied in contract theory, comparing treatments with unobservable effort to benchmark treatments with verifiable effort. In line with contract theory, when effort is a hidden action, the chosen effort levels crucially depend on the contractibility of the outcome. In our one-shot experiment the players endogenously negotiate contracts. In the absence of communication, they typically avoid gift-exchange situations. Even when the outcome is contractible and the hidden action problem is typically overcome with incentive-compatible contracts, communication is helpful since it may reduce strategic uncertainty.
    Keywords: Contract theory; Hidden action; Incentive theory; Laboratory experiments; Moral hazard
    JEL: C72 C92 D82 D86
    Date: 2015–12
  3. By: MORIYA, Fumitoshi; YAMASHITA, Takuro
    Abstract: This study addresses optimal information allocation in team production. We present a unique implementation problem of desirable effort levels and show that, under certain conditions, it is optimal to asymmetrically inform the agents even if they are ex ante symmetric. The main intuition is that the asymmetric information allocation is effective in avoiding "bad" equilibria, that is, equilibria with coordination failure. This analysis provides an explanation as to why informing agents asymmetrically might be beneficial in improving the agents' coordination behaviors.
    Keywords: Moral hazard, Unique implementation, Asymmetric information
    JEL: D21 D23 D86
    Date: 2015–12–14
  4. By: Oren Bar-Gill (Harvard Law School); Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: The Coase theorem posits: If [1] property rights are perfect, [2] contracts are enforceable, [3] preferences are common knowledge, and [4] transaction costs are zero, then the initial allocation of property rights only matters for distribution, not for efficiency. In this paper we claim that condition [1] can be dropped and show experimentally that this is also empirically true. This also holds when we frame taking as “stealing”, and when the initial possessor has to work for the good.
    Keywords: Coase theorem, absolute vs. relative right, bargaining, efficiency, distribution, fairness
    Date: 2015–11
  5. By: Lømo, Teis Lunde (Department of Economics, University of Bergen)
    Abstract: I study one manufacturer that contracts secretly with two risk averse retailers that face uncertain demand. The need for risk sharing limits the manufacturer’s scope for opportunistic deviations. If retail competition is fierce, the manufacturer’s profit increases with the levels of risk aversion and uncertainty, i.e., there is no trade-off between risk sharing and industry efficiency. The results are consistent with stylized facts from empirical and experimental research on vertical relations, including the negative correlation between vertical integration and uncertainty.
    Keywords: Vertically related markets; contracting externalities; imperfect information; risk sharing
    JEL: D81 L14 L42 L60 L81
    Date: 2015–12–21
  6. By: Ullberg, Eskil (The Ratio Institute and george Mason University)
    Abstract: This article examines coordination between inventors and innovators through prices in a market for contracts on patented technology, in a controlled laboratory experiment. Typically, a hierarchical approach is used to analyze such coordination, new technology being exogenous, and risk managed in separate markets. Price signals and search patterns are compared for three institutional mechanisms and two levels of patent validity in a 3 x 2 experimental design. “Willingness to search” in a technology map of 9 “technology areas”, each with private and uncertain values for agents, are used to characterize and differentiate institutional behavior with respect to investment decisions in new technology. The results indicate that coordination and that the willingness to search out the most valuable technology differs sharply between the mechanisms; low patent validity also results in poor coordination. Policy implications suggest facilitating a market in tradable contracts on patents is needed. This may entail lowering risk in using patent “assets” (access to quality patents and enforcements for SMEs) and new forms of legal associations for IP intensive firms.
    Keywords: patent markets; coordination; invention; innovation; patent licensing; experimental economics; intellectual property rights assets
    JEL: B00 C92 D83 O00 O30
    Date: 2015–11–27

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