nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2016‒04‒30
three papers chosen by
Guillem Roig
University of Melbourne

  1. Incentive Compatible Advertising on a Social Network By Eliaz, Kfir; Spiegler, Ran
  2. Incentive Contracts and Downside Risk Sharing. By Bernard Sinclair-Desgagné; Sandrine Spaeter
  3. The Management of Innovation: Experimental Evidence By Kusterer, David J.; Schmitz, Patrick W.

  1. By: Eliaz, Kfir; Spiegler, Ran
    Abstract: A platform that operates a social network allows firms to post display ads to network members. Each member is interested in exactly one type of product. The network structure is correlated with the profile of member's privately known preferences over product types. The platform's policy consists of a display rule (which specifies the stationary probability with which each product is shown to each network member, as a function of the network structure) and an advertising fee (which the platform charges from firms as a function of their reported type). We provide conditions for the existence of an incentive-compatible policy that maximizes and fully extracts firms' surplus. This objective is easier to attain when the network is more informative of members' preferences, consumers are more attentive to advertising and their frequency of repeated purchases is higher, and advertisers are less informed of the network structure. We provide a more detailed characterization when the network is generated according to the "stochastic block model", thus linking our model to the "community detection" problem in Network Science.
    Date: 2016–04
  2. By: Bernard Sinclair-Desgagné; Sandrine Spaeter
    Abstract: This paper seeks to characterize incentive compensation in a principal-agent moral hazard setting in which the principal is prudent, or downside risk averse, as many situations (such as that of a patient in hospital or a regulator dealing with food safety) suggest she should be. We show that optimal incentive pay should then be 'approximately concave' in performance, the approximation being closer the more downside risk averse the principal is compared to the agent. Limiting the agent's liability would improve the approximation, but taxing the principal would make it coarser. The notion of an approximately concave function we introduce here to describe the pay-performance relationship is relatively recent in mathematics; it is intuitive and translates into concrete empirical implications, notably for the composition of incentive pay. We also clarify which measure of prudence - among the various ones proposed in the literature - is relevant to investigate the tradeoff between downside risk sharing and incentives.
    Keywords: Pay-performance relationship; executive compensation; downside risk aversion; approximate concavity.
    JEL: D82 M12 M52
    Date: 2016
  3. By: Kusterer, David J.; Schmitz, Patrick W.
    Abstract: We report data from a laboratory experiment with 566 participants that was designed to test Aghion and Tirole's (1994a) management of innovation theory. A research unit and a customer can invest to increase the probability of making an innovation. When the innovation is made, the parties bargain over the division of the revenue. In line with Aghion and Tirole's (1994a) predictions based on the Grossman-Hart-Moore property rights approach, we find that ownership matters for the division of the revenue and the investments. However, communication can somewhat mitigate the theoretical problem that the customer will not relinquish ownership to the cash-constrained research unit.
    Keywords: Incomplete Contracts; Investment incentives; Laboratory experiments; Property rights
    JEL: C92 D23 D86 O32
    Date: 2016–04

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