nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2016‒09‒18
four papers chosen by
Guillem Roig
University of Melbourne

  1. Goal Setting in the Principal-Agent Model: Weak Incentives for Strong Performance By Brice Corgnet; Joaquín Gómez-Miñambres; Roberto Hernán-Gonzalez
  2. Multiple Lenders, Strategic Default and Covenants By Jean Paul Decamps; Catherine Casamatta; Arnold Chassagnon; Andrea Attar
  3. The optimal contract under adverse selection in a moral-hazard model with a risk-averse agentAbstract: This paper studies the optimal contract offered by a risk-neutral principal to a riskaverse agent when the agent’s hidden efficiency and action both improve the probability of the project being successful. We show that if the agent is sufficiently prudent and efficient, the principal induces a higher probability of success than under moral hazard, despite the costly informational rent given up. Moreover, the conditions to avoid pooling are difficult to satisfy because of the different kinds of incentives to be managed and the overall trade-off between rent extraction,insurance, and efficiency involved.Keywords:Adverse selection, moral hazard, risk aversion, prudence By Lionel Thomas
  4. Farmers’ Preferences for Supermarket Contracts in Kenya By Ochieng, Dennis O.; Veettil, Prakashan C.; Qaim, Matin

  1. By: Brice Corgnet (EMLYON Business School, Univ Lyon, GATE L-SE UMR 5824, F-69131 Ecully, France); Joaquín Gómez-Miñambres (Bucknell University, Department of Economics, One Dent Drive, Lewisburg, PA 17837. Chapman University, Economic Science Institute. One University Drive, Orange, California 92866); Roberto Hernán-Gonzalez (Nottingham University, Business School, Nottingham, UK)
    Abstract: We study a principal-agent framework in which principals can assign wage-irrelevant goals to agents. We find evidence that, when given the possibility to set wage-irrelevant goals, principals select incentive contracts for which pay is less responsive to agents’ performance. We show that average performance of agents is higher in the presence of goal setting than in its absence despite weaker incentives. We develop a principal-agent model with reference-dependent utility that illustrates how labor contracts combining weak monetary incentives and wage-irrelevant goals can be optimal. It follows that recognizing the pervasive use of non-monetary incentives in the workplace may help account for previous empirical findings suggesting that firms rely on unexpectedly weak monetary incentives.
    Keywords: Principal-agent models, incentive theory, non-monetary incentives, goal setting, reference-dependent utility, laboratory experiments
    JEL: C92 D23 M54
    Date: 2016
  2. By: Jean Paul Decamps (Toulouse School of Economics); Catherine Casamatta (Toulouse School of Economics); Arnold Chassagnon (Paris School of Economics); Andrea Attar (Toulouse School of Economics and University of Roma Tor Vergata)
    Abstract: We study capital markets subject to moral hazard when investors cannot prevent side trading, thereby facing an externality if firms raise funds from multiple sources. We analyze whether investors’ ability to design financial covenants that may include exclusivity clauses mitigates this externality. Following covenant violations, investors can accelerate the repayment of their loan, adjust its size, or increase interest rates. Enlarging contracting opportunities generates a severe market failure: with covenants, equilibria are indeterminate and Pareto ranked. We show that an investors-financed subsidy scheme to entrepreneurs alleviates the incentive to overborrow and sustains the competitive allocation as the unique equilibrium one.
    Date: 2016
  3. By: Lionel Thomas (Université de Bourgogne Franche-Comté, CRESE)
    JEL: D82
    Date: 2016–09
  4. By: Ochieng, Dennis O.; Veettil, Prakashan C.; Qaim, Matin
    Abstract: With the modernization of global agri-food systems, the role of contract farming is increasing. This also involves smallholder farmers in developing countries. While previous studies have looked at economic impacts of contract schemes on smallholder farmers, little is known about farmers’ preferences for contracting in general, and for specific contract design attributes in particular. Better understanding farmers’ preferences and constraints is important to make smallholder contract schemes more viable and beneficial. This article builds on a choice experiment to analyze farmers’ preferences and preference heterogeneity for contracts in Kenya. In the study region, supermarkets use contracts to source for fresh vegetables directly from preferred suppliers. However, farmer dropout rates are high. Mixed logit models are estimated to examine farmers’ attitudes towards critical contract design attributes. Having to deliver their harvest to urban supermarkets is costly; hence farmers require a significant output price markup. Farmers also dislike delayed payments that are commonplace in contract schemes. The most problematic contract attribute is related to unpredictable product rejection rates, which substantially add to farmers’ risk. Designing contracts with lower transaction costs, more transparent quality grading, and fairer risk-sharing clauses could enhance smallholder participation in supermarket procurement channels.
    Keywords: supermarkets, contracts, farmers’ preferences, choice experiment, Kenya, Agribusiness, Community/Rural/Urban Development, Industrial Organization, Institutional and Behavioral Economics, International Development, O12, O13, Q12, Q13, Q18,
    Date: 2016–08

This nep-cta issue is ©2016 by Guillem Roig. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.