nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2016‒02‒04
five papers chosen by
Guillem Roig
University of Melbourne

  1. Information Acquisition in Vertical Relations By Pio Baake; Andreas Harasser; Friederike Heiny
  2. Competing Mechanisms in Markets for Lemons By Sarah Auster; Piero Gottardi
  3. Marking to Market versus Taking to Market By Guillaume Plantin; Jean Tirole
  4. Using Outcome Indicators to Improve Policies: Methods, Design Strategies and Implementation By Abel Schumann
  5. On the individual optimality of economic integration By CASTRO, Rui; KOUMTINGUÉ, Nelnan

  1. By: Pio Baake; Andreas Harasser; Friederike Heiny
    Abstract: We analyze a simple supply chain with one supplier, one retailer and uncertainty about market demand. Focusing on the incentives of the supplier and the retailer to enhance their private information about the actual market conditions, we show that choices on information acquisition are strategic complements. While the retailer's incentives are mainly driven by the information rent that he can earn, the supplier will choose to acquire information only if the retailer is rather well informed, even though the information is free of charge.
    Keywords: Asymmetric information, information acquisition, vertical relations
    JEL: D82 D83 D86
    Date: 2016
  2. By: Sarah Auster; Piero Gottardi
    Abstract: We study the competitive equilibria in a market with adverse selection and search frictions. Uninformed buyers post general direct mechanisms and informed sellers choose where to direct their search. We demonstrate that there exists a unique equilibrium allocation and characterize its properties: all buyers post the same mechanism and a low quality object is traded whenever such object is present in a meeting. Sellers are thus pooled at the search stage and screened at the mechanism stage. If adverse selection is sufficiently severe, this equilibrium is constrained inefficient. Furthermore, the properties of the equilibrium differ starkly from the case where meetings are restricted to be bilateral, in which case in equilibrium sellers sort themselves at the search stage across different mechanisms. Compared to such sorting equilibria, our equilibriumyields a higher surplus for most, but not all, parameter specifications.
    Date: 2016
  3. By: Guillaume Plantin (Département d'économie); Jean Tirole (Toulouse School of Economics (TSE))
    Abstract: While the debate on cost and market-value accounting has been raging for years, economists lack a framework allowing a comparison of their relative merits. This paper considers an agency model in which the measurement of an asset can be based on public market data (marking to market) and/or on the realization of its value through costly resale to an informed buyer (taking to market). At the optimal contract, noisier market data lead to cost accounting and gains trading (selling winners/keeping losers) whereas accurate data naturally favor market-value accounting. The quality of market data and the magnitude of resale costs both depend on the volume of transactions, and therefore on accounting rules. The paper studies the mutual feedback between individually optimal accounting rules and asset market liquidity. This equilibrium approach reveals a socially excessive use of market-value accounting that dries up market liquidity and reduces the informativeness of price signals.
    Keywords: Cost and market value accounting; Agency; Gains trading; Equilibrium accounting rules
    JEL: D82 M41 M52
    Date: 2015–11
  4. By: Abel Schumann
    Abstract: This paper discusses the use of outcome indicators for policy monitoring. In addition to providing general recommendations on their design and implementation, it makes two contributions to the existing literature. First, it shows the importance of distinguishing outcome indicators from other types of indicators and demonstrates the need to develop clear policy objectives as a prerequisite for meaningful outcome indicators. Second, it analyses the use of outcome indicators in specific settings; on the sub-national level, in multi-level governance frameworks and in the context of EU cohesion policy. The paper argues that outcome indicators are better used in relational contracts than in transactional contracts between governments. Furthermore, it highlights the need to harmonise different monitoring frameworks within an administration.
    Keywords: indicators, performance measurement, monitoring and evaluation
    JEL: Y80
    Date: 2016–01–18
  5. By: CASTRO, Rui; KOUMTINGUÉ, Nelnan
    Abstract: Which countries find it optimal to form an economic union? We emphasize the risk-sharing benefits of economic integration. Consider an endowment world economy model, where international financial markets are incomplete and contracts not enforceable. A union solves both frictions among member countries. We uncover conditions on initial incomes and net foreign assets of potential union members such that forming a union is welfare-improving over standing alone in the world economy. Consistently with evidence on economic integration, unions in our model occur (i) relatively infrequently, and (ii) emerge more likely among homogeneous countries, and (iii) rich countries.
    Keywords: Incomplete markets; Endogenous borrowing constraints; Risk sharing; Economic integration
    JEL: F15 F34 F36 F41
    Date: 2015

This nep-cta issue is ©2016 by Guillem Roig. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.