nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2016‒09‒11
six papers chosen by
Guillem Roig
University of Melbourne

  1. Deferred compensation and risk-taking incentives By Roman Inderst; Marcus Opp; Florian Hoffmann
  2. Self-Chosen Goals : Incentives and Gender Differences (revision of 2015-021) By Dalton, P.S.; Gonzalez Jimenez, V.H.; Noussair, Charles
  3. Contracting with Researchers By Matthias Verbeck; Elisabeth Schulte
  4. Political corruption in the execution of public contracts By Chiappinelli, Olga
  5. The Value of Relational Adaptation in Outsourcing: Evidence from the 2008 shock to the US Airline Industry By GIL, Ricard; KIM, Myongjim; ZANARONE, Giorgio
  6. Two-Stage Contests with Preferences over Style By Kaplan, Todd R; Wettstein, David

  1. By: Roman Inderst (Univ. Frankfurt and Imperial College Lon); Marcus Opp (UC Berkeley, Haas School of Business); Florian Hoffmann (University of Bonn)
    Abstract: Our paper develops a simple principal-agent framework to analyze the equilibrium relationship between risk-taking and the timing of pay. In our setup, the agent's one-time action has persistent effects through affecting the arrival time distribution of a disaster event. While the principal receives informative signals about the agent's action over time, it is costly to rely on this information for incentive pay since the agent is relatively impatient. Optimal compensation contracts resolve the tension between impatience and information with at most two payout dates. Our framework lends itself to analyze recent regulatory interventions mandating minimum deferral periods and clawback provisions in the financial sector. It shows how such regulatory interference in the timing dimension causes the principal to adjust other dimensions of the compensation contract, which may then lead to higher risk-taking. Mandatory deferral requirements are more likely to be effective in reducing risk-taking when competition for agents is high.
    Date: 2016
  2. By: Dalton, P.S. (Tilburg University, Center For Economic Research); Gonzalez Jimenez, V.H. (Tilburg University, Center For Economic Research); Noussair, Charles (Tilburg University, Center For Economic Research)
    Abstract: To boost employees’ performance, firms often offer monetary bonuses when production goals are reached. However, the available evidence indicates that the particular level at which a goal is set is critical to the effectiveness of this practice. Goals must be challenging yet achievable. Computing optimal goals when employees have private information about their own abilities may be impossible for an employer. To solve this problem, we propose a compensation scheme, in which workers set their own production goals and bonuses. We provide a simple model of self-chosen goals and test its predictions in the laboratory. The model predicts that (a) the self-chosen goal contract is more cost effective than a piece rate contract for an employer interested in attaining a desired level of output, and that (b) workers set goals that they systematically outperform. Our experimental data support both predictions. We also observe sharp gender differences in the experiment. The self-chosen goal contract increases the performance of men but not of women relative to a piece rate contract. Women set lower goals, but outperform them to a greater extent than men.
    Keywords: contracts; bonus ; goal-dependant preferences; endogenous goals; productivity; gender differences
    JEL: C91 C92 J16 J24
    Date: 2016
  3. By: Matthias Verbeck (University of Marburg); Elisabeth Schulte (University of Marburg)
    Abstract: We study a setting in which one or two agents conduct research on behalf of a principal. The agents’ success depends on effort and the choice of a research technology that is uncertain with respect to its quality. A single agent has no incentive to deviate from the principal’s preferred technology choice. In the multiagent-setting researchers pursue individual rather than overall success which yields a preference for the most promising technology. We show that a mechanism that deters this bias towards mainstream research always entails an efficiency loss if researchers are risk-averse. Our results suggest that there is too little diversity in delegated research.
    Keywords: Moral hazard, Hidden action, Incentives in teams, Delegated research, Academic organization, Diversity in research
    JEL: D82 D83 D86
    Date: 2016
  4. By: Chiappinelli, Olga
    Abstract: This paper presents a novel theory of corruption in public procurement. It considers an agency setting of contract execution where the principal is a politician who can commit to a contract auditing policy. It is found that a benevolent politician, by choosing a sufficiently strict auditing, deters the contracting firm from padding costs; conversely, a selfish politician chooses a relatively lax auditing in order to create an incentive for cost-padding, and engages in corruption with the firm in case of detection. If the cost of auditing is high enough, even a benevolent politician might prefer to allow cost-padding.
    Keywords: Corruption in procurement; Cost-padding; Selfish politician; Endogenous auditing; Procurement contracts; Principal-agent model.
    JEL: D73 D82 L51
    Date: 2016
  5. By: GIL, Ricard; KIM, Myongjim; ZANARONE, Giorgio
    Abstract: In the airline industry, ex-post adaptation of flight schedules is necessary in the presence of bad weather conditions. When major carriers contract with independent regionals, conflicts over these adaptation decisions typically arise. Moreover, the celerity of needed adjustments requires that adaptation be informal, and hence enforced relationally. In this paper, we theoretically analyze, and empirically test for, the importance of relational adaptation in the airline industry. Our model shows that for relational contracts to be selfenforcing, the long-term value of the relationship between a major and a regional airline must be at least as large as the regional's cost of adapting flight schedules across joint routes. Thus, when facing a shock that forces it to terminate some routes, the major is more likely to preserve routes outsourced to regional airlines that have higher adaptation costs, as the value of the major's relationship with those regionals is larger. We analyze the evolution of U.S. airline networks around the 2008 financial crisis, and we find that consistent with our theoretical predictions, regional routes belonging to networks with worse average weather, and hence higher adaptation costs, were more likely to survive after the shock.
    Keywords: Relational contracting, adaptation, natural experiment, airlines, outsourcing
    JEL: L14 L22 L24 L93
    Date: 2016–09
  6. By: Kaplan, Todd R; Wettstein, David
    Abstract: Many grant applications have a preliminary stage where only a select group are invited to submit a full application. Similarly, procurement contracts by governments are often awarded through a two-stage procedure. We model and analyze such environments where the designer cares about the style of the application as well as its quality. The designer has the option of choosing an initial stage, where contestants can enter and learn about their desirability while the designer learns about their style. We determine closed form solutions for equilibrium outcomes and designer payoffs and use this to analyze design questions regarding whether or not a second stage is desirable, different rules for deciding who will advance, as with whether or not to communicate the number of contestants that qualify for the second stage.
    Keywords: contests, innovation, all-pay auctions, mechanism design.
    JEL: C70 D44 L12 O32
    Date: 2016–09–06

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