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on Contract Theory and Applications |
| By: | Biener, Christian; Eling, Martin; Pradhan, Shailee |
| Abstract: | Incentivizing unobservable effort in risky environments, such as in insurance, credit, and labor markets, is vital as moral hazard may otherwise cause significant welfare losses including the outright failure of markets. Ensuring incentive-compatibility through partial risk-sharing between principal and agent, however, is undesirable for risk-averse agents. We provide theoretical intuition on how joint liability in groups of agents can ensure incentive-compatibility when agents share pro-social concerns. Two independent behavioral experiments framed in an insurance context support the hypotheses derived from our theory. In particular, effort decreases when making payoffs of agents less state-dependent, but this effect is mitigated with joint liability in a group scheme where agents are additionally motivated by pro-social concerns. Activating strategic motives slightly increases effort further; particularly in non-anonymous groups with high network strength. The results suggest that joint liability within groups of pro-social agents is a promising policy under risk and asymmetric information and may improve efficiency. |
| Keywords: | Moral hazard, Group joint liability, Pro-social preferences, Experiments |
| JEL: | D03 D81 D82 G22 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:usg:sfwpfi:2016:10&r=cta |
| By: | Fan, Ying; Kühn, Kai-Uwe; Lafontaine, Francine |
| Abstract: | Financial constraints are considered an important impediment to growth for small businesses. We study theoretically and empirically the relationship between the financial constraints of agents and the organizational decisions and growth of principals, in the context of franchising. We find that a 30 percent decrease in average collateralizable housing wealth in an area is associated with a delay in chains' entry into franchising by 0.33 years on average, or 10 percent of the average waiting time, and a reduction in chain growth and hence a reduction in franchised chain employment of about 9 percent. |
| Keywords: | contracting,incentives,principal-agent,empirical,collateralizable housing wealth,entry,growth |
| JEL: | L14 L22 D22 D82 L8 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:223&r=cta |
| By: | Roberto Burguet; Juan-José Ganuza; José García-Montalvo |
| Abstract: | We review microeconomic research on corruption from the last thirty years. We start by analyzing the seminal models of corruption built on three-tier, delegation models. Then, go into more details of the context of corrupt deals, and discuss the main economic factors that affect corruption. We discuss incentives and compensation in bureaucracies, and the interplay of market and bureaucratic structure. Competition and contract design will also be reviewed in relation to procurement under corruptible agents. After reviewing the theoretical contributions, we turn to the empirical evidence. We begin discussing measurement issues, and then move to the analysis of the empirical evidence relative to the theoretical models discussed in previous sections. Finally, we cover several anti-corruption mechanisms proposed in the literature and discuss their relative merits as devices to control or eliminate illegal activities. |
| Keywords: | corruption, bribes, deterrence, Bureaucracy, competition, game theory, Mechanism Design |
| JEL: | C73 D72 D73 K42 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:908&r=cta |
| By: | Liran Einav; Amy Finkelstein; Paul Schrimpf |
| Abstract: | A large literature in empirical public finance relies on “bunching” to identify a behavioral response to non-linear incentives and to translate this response into an economic object to be used counterfactually. We conduct this type of analysis in the context of prescription drug insurance for the elderly in Medicare Part D, where a kink in the individual’s budget set generates substantial bunching in annual drug expenditure around the famous “donut hole.” We show that different alternative economic models can match the basic bunching pattern, but have very different quantitative implications for the counterfactual spending response to alternative insurance contracts. These findings illustrate the importance of modeling choices in mapping a compelling reduced form pattern into an economic object of interest. |
| JEL: | D12 G22 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22369&r=cta |
| By: | Dionne, Georges (HEC Montreal, Canada Research Chair in Risk Management); Gueyie, Jean-Pierre (HEC Montreal, Canada Research Chair in Risk Management); Mnasri, Mohamed (HEC Montreal, Canada Research Chair in Risk Management) |
| Abstract: | We investigate the dynamics of corporate hedging programs by US oil producers and examine the effects of hedging maturity choice on firm value. We find evidence of a concave relation between hedging maturity and the likelihood of financial distress and oil spot prices. We further investigate the motivations of the early termination of outstanding hedging contracts. We evaluate the causal effects of hedging and show that hedging maturity increases firm value. Using the essential heterogeneity approach, we find that firms value is more strongly related to short-term hedging maturities. This is the first time this approach is applied in corporate finance. |
| Keywords: | Hedging maturity; early termination of contracts; firm value; heterogeneous treatment effects; essential heterogeneity models; oil industry |
| JEL: | D80 G32 |
| Date: | 2016–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:ris:crcrmw:2016_002&r=cta |