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on Contract Theory and Applications |
| By: | Brian Bell; John Van Reenen |
| Abstract: | Would moving to relative performance contracts improve the alignment between CEO pay and performance? To address this we exploit the large rise in relative performance awards and the share of equity pay in the UK over the last two decades. Using new employer-employee matched datasets we find that the CEO pay-performance relationship remains asymmetric: pay responds more to increases in shareholders’ return performance than to decreases. Further, this asymmetry is stronger when governance appears weak. Second, there is substantial “pay-for-luck” as remuneration increases with random positive shocks, even when the CEO has equity awards that explicitly condition on firm performance relative to peer firms in the same sector. A reason why relative performance pay fails to deal with pay for luck is that CEOs who fail to meet the terms of their past performance awards are able to obtain more generous new equity rewards in the future. Moreover, this “compensation effect” is stronger when the firm has weak corporate governance. These findings suggest that reforms to the formal structure of CEO pay contracts are unlikely to align incentives in the absence of strong shareholder governance. |
| JEL: | J33 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22407&r=cta |
| By: | Michael Geruso |
| Abstract: | In many markets insurers are barred from price discrimination on consumer characteristics like age, gender, and medical history. By themselves, such restrictions are known to exacerbate adverse selection problems. But the conventional wisdom—widely reflected in policy—is that with regulatory tools like premium subsidies, it is possible to address selection and induce efficient plan choices without price-discriminating. In this paper, I show why this conventional wisdom is wrong: As long as different sets of consumers (men and women, rich and poor, young and old) differ in their willingness-to-pay for insurance conditional on the losses they generate, then price discrimination across such groups is welfare-improving. The conventional wisdom is wrong because it implicitly assumes a one-to-one mapping from insurable risk to insurance valuation. I show that demand heterogeneity that breaks this one-to-one relationship is empirically relevant in a consumer health plan setting. Younger and older consumers and men and women reveal strikingly different demand for health insurance, conditional on their objective medical spending risk. This implies that these groups must face different prices in order to sort themselves efficiently across insurance contracts. The theoretical and empirical analysis highlights a previously unexplored, but fundamental, tradeoff between equity and efficiency that is unique to selection markets. |
| JEL: | I11 I13 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22440&r=cta |
| By: | Fałkowski, Jan; Curzi, Daniele; Olper, Alessandro |
| Abstract: | As the recent contributions to the literature show, institutional differences are an important source of comparative advantage. Yet our understanding of the exact mechanisms through which institutions affect trade flows is still rather limited. In this paper, focusing on food sector, we examine a particular channel through which this effect may occur. Using detailed country-product data, we focus on the relationship between the quality of contracting institutions and product quality, which is commonly perceived as a key feature of how countries specialise in production. In line with the existing theoretical arguments, we find that product quality improvements, which can proxy for an adoption of more advanced technologies, are associated with products made in countries-industries characterised by less contractual incompleteness and characterised by greater initial level of technological complementarities between intermediate inputs. |
| Keywords: | contracting institutions, product quality, technology adoption, trade, food industry, Agribusiness, Industrial Organization, F14, L15, O17, O33, Q17, |
| Date: | 2016–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aiea16:242321&r=cta |
| By: | Coviello, Decio; Moretti, Luigi; Spagnolo, Giancarlo; Valbonesi, Paola |
| Abstract: | Disputes over penalties for breaching a contract are often resolved in court. A simple model illustrates how inefficient courts can sway public buyers from enforcing a penalty for late delivery in order to avoid litigation, therefore inducing sellers to delay contract delivery. By using a large dataset on Italian public procurement, we empirically study the effects of court inefficiency on public work performance. We find that where courts are inefficient: i) public works are delivered with longer delays; ii) delays increase for more valuable contracts; iii) contracts are more often awarded to larger suppliers; and iv) a higher share of the payment is postponed after delivery. Other interpretations receive less support from the data. |
| Keywords: | Court efficiency; public procurement; time incentives; performance in contract execution; delay; litigation; enforcement cost. |
| JEL: | H41 H57 K41 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11426&r=cta |