nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2016‒06‒09
seven papers chosen by
Guillem Roig
University of Melbourne

  1. The Value of Delegated Quality Control and Market Size with an Application to Kyrgyzstan Dairy By Saak, Alexander E.
  2. A little skin in the microfinance game: reducing moral hazard in joint liability group lending through a mandatory collateral requirement By Flatnes, Jon Einar; Carter, Michael R.
  3. Image versus Information: Changing Societal Norms and Optimal Privacy By Ali, S. Nageeb; Benabou, Roland
  4. Towards Understanding the Ghanaian Farmer’s Decision to Enter a Contract with a Buyer By Interis, Matthew G.; Cordero-Salas, Paula; Mulangu, Francis
  5. Contracting theory with competitive interacting agents By Romuald Elie; Dylan Possama\"i
  6. Mechanism Design with Two Types of Information By Seung Han Yoo
  7. Optimal Licensing Contracts and Market Competition By Xia, Tian; Guan, Zhengfei

  1. By: Saak, Alexander E.
    Abstract: This paper studies the decision of a firm that sells an experience good to delegate quality control to an independent monitor. In an infinitely repeated game consumers’ trust provides incentives to (1) acquire information about whether the good is defective and (2) withhold the good from sale if it is defective. If third-party reports are observable to consumers, delegation of monitoring lessens the first and dispenses with the second moral hazard concern but also creates agency costs due to either limited liability or lack of commitment. In equilibrium the firm controls quality without an independent monitor only if trades are sufficiently frequent and consumer information about quality is sufficiently precise. This result holds under different assumptions about feasible contracts, collusion, verifiability of reports, joint inspections, and the number of firms that hire the third-party monitor. If third-party reports are not publicly observed, delegation can be optimal only if two or more firms hire the third-party monitor because then both moral hazard concerns are present under delegation.
    Keywords: quality control, trust, repeated game, imperfect monitoring, moral hazard, food safety, Agribusiness, Agricultural and Food Policy, Food Consumption/Nutrition/Food Safety, Industrial Organization, Marketing,
    Date: 2016–05–24
  2. By: Flatnes, Jon Einar; Carter, Michael R.
    Abstract: Both collateralized individual loan contracts and joint liability group lending contracts have received much attention in the microfinance literature, yet neither contract has been found to be optimal from a welfare perspective. On the one hand, a heavily collateralized individual loan contract is very risky for borrowers, resulting in low levels of credit market participation. On the other hand, while joint liability contracts are designed to harness the social collateral among community members, numerous studies have shown that such contracts are prone to moral hazard, free-riding, and collusion. This paper analyzes an alternative contract which combines joint liability with a modest collateral requirement. Using a simple theoretical framework, we show that adding a collateral requirement to a joint liability contract reduces moral hazard but has an ambiguous effect on credit market participation. To test the predictions of the model, we conduct a unique framed field experiment among active credit group members in Tanzania. The results demonstrate that adding a collateral requirement reduces moral hazard among borrowers and helps increase repayments without compromising the effect of the social collateral in the groups. Moreover, we find evidence that a collateral requirement leads to a modest reduction in credit market participation.
    Keywords: Credit Rationing, Moral Hazard, Collateral, Field Experiments, Joint Liability, Agricultural Finance, Financial Economics, Institutional and Behavioral Economics, Risk and Uncertainty, D82, G21, O16, Q14,
    Date: 2016
  3. By: Ali, S. Nageeb (Pennsylvania State University); Benabou, Roland (Princeton University)
    Abstract: We analyze the costs and benefits of using social image to foster virtuous behavior. A Principal seeks to motivate reputation-conscious agents to supply a public good. Each agent chooses how much to contribute based on his own mix of public-spiritedness, private signal about the value of the public good, and reputational concern for appearing prosocial. By making individual behavior more visible to the community the Principal can amplify reputational payoffs, thereby reducing free-riding at low cost. Because societal preferences constantly evolve, however, she knows only imperfectly both the social value of the public good (which matters for choosing her own investment, matching rate or legal policy) and the importance attached by agents to social esteem and sanctions. Increasing publicity makes it harder for the Principal to learn from what agents do (the "descriptive norm") what they really value (the "prescriptive norm"), thus presenting her with a tradeoff between incentives and information aggregation. We derive the optimal degree of privacy/publicity and matching rate, then analyze how they depend on the economy's stochastic and informational structure. We show in particular that in a fast-changing society (greater variability in the fundamental or the image-motivated component of average preferences), privacy should generally be greater than in a more static one.
    Keywords: social norms, privacy, transparency, incentives, esteem, reputation, shaming punishments, conformity, societal change, culture
    JEL: D62 D64 D82 H41 K42 Z13
    Date: 2016–05
  4. By: Interis, Matthew G.; Cordero-Salas, Paula; Mulangu, Francis
    Abstract: Ghanaian farmers often engage in formal or informal contracts with buyers of their product. Because the illiteracy rate among farmers is high and because of the appeal of side-selling (where farmers can sell at a higher price to someone other than the contract buyer), these agreements have historically been oral and therefore difficult to enforce. In this study, we use a choice experiment to determine which contract attributes make farmers more or less likely to enter into one. Farmers choose among proposed contracts that vary by whether they are written, the specified pricing structure, one’s familiarity with the buyer, whether side-selling is permitted, and whether the buyer provides support in the form of seed, fertilizers, or pesticides. We find that farmers are much more likely to enter written contracts and that they do not appear to prefer contracts that permit side-selling. They will avoid contracts that specify a quality criterion for their product, even if they will be paid more for better quality product. Familiarity with the buyer is also important for entering a contract. This study was funded by the Ghanaian Ministry of Food and Agriculture to inform the establishment of an arbitration mechanism for agricultural contracts.
    Keywords: Agricultural Contracts, Ghana, Choice Experiment, Agricultural Finance, Community/Rural/Urban Development, International Development,
    Date: 2016
  5. By: Romuald Elie; Dylan Possama\"i
    Abstract: In a framework close to the one developed by Holmstr\"om and Milgrom [44], we study the optimal contracting scheme between a Principal and several Agents. Each hired Agent is in charge of one project, and can make efforts towards managing his own project, as well as impact (positively or negatively) the projects of the other Agents. Considering economic Agents in competition with relative performance concerns, we derive the optimal contracts in both first best and moral hazard settings. The enhanced resolution methodology relies heavily on the connection between Nash equilibria and multidimensional quadratic BSDEs. The optimal contracts are linear and each agent is paid a fixed proportion of the terminal value of all the projects of the firm. Besides, each Agent receives his reservation utility, and those with high competitive appetence are assigned less volatile projects, and shall even receive help from the other Agents. From the principal point of view, it is in the firm interest in our model to strongly diversify the competitive appetence of the Agents.
    Date: 2016–05
  6. By: Seung Han Yoo (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: In many real world situations, a principal faces an agent who has two different types of information: one associated with contractible actions and the other not. We first establish an impossibility result such that the principal cannot implement a nonlinear mechanism given the information constraint. The main result shows that the principal can still obtain the second-best payoff with a direct mechanism by characterizing incentives of a supervisor. The nature of incompleteness suggests a foundation of incomplete contract, the agent’s information structure, and thus demands a different solution, an informational hierarchical structure with the supervisor. This result has new implications for the theory of the firm to explain the origin of a firm’s decentralized system, as opposed to what the standard mechanism theory offers.
    Keywords: Two types of information, Incomplete contract, Information structure
    JEL: C72
    Date: 2016
  7. By: Xia, Tian; Guan, Zhengfei
    Abstract: The U.S. strawberry industry faces serious challenges from Mexican competition. Optimal limited licensing to selected Mexican growers can help Florida strawberry industry protect the intellectual property rights of new varieties and improve its competitiveness and profits in the U.S. market. This study analyzes the mechanisms of the optimal licensing contracts offered to a few selected Mexican companies/growers.
    Keywords: licensing, market competition, strawberry, Industrial Organization, International Relations/Trade, Marketing, Q13, L14,
    Date: 2016–05–25

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