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on Contract Theory and Applications |
| 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 controls, monitoring techniques, food safety, repeated game, trust, imperfect monitoring, moral hazard, value chains, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:fpr:ifprid:1526&r=cta |
| By: | Bhaskar, Venkataraman; Mailath, George |
| Abstract: | We study dynamic moral hazard with symmetric ex ante uncertainty about the difficulty of the job. The principal and agent update their beliefs about the difficulty as they observe output. Effort is private and the principal can only offer spot contracts. The agent has an additional incentive to shirk beyond the disutility of effort when the principal induces effort: shirking results in the principal having incorrect beliefs. We show that the effort inducing contract must provide increasingly high powered incentives as the length of the relationship increases. Thus it is never optimal to always induce effort in very long relationships. |
| Keywords: | differences in beliefs; high-powered incentives.; moral hazard; principal-agency |
| JEL: | D01 D23 D86 J30 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11431&r=cta |
| By: | Richard Frensch (IOS Regensburg); Roman Horváth; Stephan Huber |
| Abstract: | We proposeanovel way to measure the rule of law intensity of exports at the goods level based on nearly 100 million disaggregated bilateral trade flows around the globe. We categorise goods into three groups: fragmented, primary and other. The theoretical literature on hold-up problems connected to incomplete or incompletely enforceable contracts or property rights predicts that goods resulting from fragmented production processes should be the most rule of law intensive. However, we find that the rule of law intensity of other goods is, on average, only slightly lower than that of fragmented goods. We examine how exogenous variation in countries’ trade patterns influences the quality of institutions. Our regressions show that trade flows generated by fragmented and other processes of production improve rule of law, while trade flows generated by primary production do not. |
| Keywords: | trade patterns, rule of law |
| JEL: | C83 D91 E21 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ost:wpaper:358&r=cta |