nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2016‒09‒25
five papers chosen by
Guillem Roig
University of Melbourne

  1. Prizes versus Contracts as Incentives for Innovation By Che, Yeon-Koo; Iossa, Elisabetta; Rey, Patrick
  2. Push or pull? By David Michael Rietzke; Yu Chen
  3. Screening multiple potentially false experts By Francisco Barreras; Álvaro J. Riascos
  4. Multiple Contracting in Insurance Markets By Thomas Mariotti
  5. Stability of rejections and Stable Many-to-Many Matchings By G. A. Koshevoy

  1. By: Che, Yeon-Koo; Iossa, Elisabetta; Rey, Patrick
    Abstract: Procuring an innovation involves motivating a research effort to generate a new idea and then implementing that idea efficiently. If research efforts are unverifiable and implementation costs are private information, a trade-off arises between the two objectives. The optimal mechanism resolves the tradeoff via two instruments: a monetary prize and a contract to implement the project. The optimal mechanism favors the innovator in contract allocation when the value of innovation is above a certain threshold, and handicaps the innovator otherwise. A monetary prize is employed as an additional incentive but only when the value of innovation is suficiently high.
    Keywords: Contract rights, Inducement Prizes, Innovation, Procurement and R&D.
    JEL: D44 D82 H57 O31 O38 O39
    Date: 2016–09
  2. By: David Michael Rietzke; Yu Chen
    Abstract: We study a principal-agent model wherein the agent is better informed of the prospects of the project, and the project requires both an observable and unobservable input. We show (1) Performance pay may not be optimal, even if output is the only informative signal of an essential input; (2) Total surplus tends to be higher if one input is unobservable than if both inputs are observable; and (3) Bunching may arise amongst low and intermediate types. We explore the implications for push and pull programs used to encourage R&D activity, but our results have applications beyond this context.
    Keywords: Pay for Performance, Moral Hazard, Adverse Selection, Observable Action, Principal-Agent Problem, Grants, Prizes
    JEL: D82 D86 O31
    Date: 2016
  3. By: Francisco Barreras; Álvaro J. Riascos
    Abstract: A decision maker is presented with a theory from a self proclaimed expert about the probability of occurrence of certain events. The decision maker faces the possibility that the expert is completely ignorant about the data generating process and so she’s interested in mechanisms that allow her to screen informed experts from uninformed ones. The decision maker needs to control for type I error, however, since she’s also uncertain about the true stochastic process, this gives room for uninformed experts to make strategic forecasts and ignorantly pass tests and profit from contracts. We present an original multiple expert model where a contract achieves screening of informed and uninformed experts by means of pitting experts’ predictions against each other. Additionally, we present a theoretical review of the main findings in two branches of literature that attempt to solve the expert screening problem. Namely models about testing experts and models in contract theory that pursue screening of experts.
    Keywords: Testing of multiple experts, manipulation, adverse selection
    Date: 2016–09–10
  4. By: Thomas Mariotti (Toulouse School of Economics)
    Abstract: We study a model of insurance markets in which multiple contracting endogenously emerges in equilibrium. Different layers of coverage are fairly priced according to the types of consumers who purchase them, giving rise to cross-subsidies between types, but not between contracts. Riskier consumers demand greater total coverage at an increasing unit price, but the contracts offered by firms exhibit quantity discounts. We emphasize the need to regulate the supply side of insurance markets, while consumers can be left free to choose their coverage level.
    Date: 2016
  5. By: G. A. Koshevoy (CEMI and Poncelet laboratoty (IMU and CNRS (UMI 2615)))
    Abstract: For models of many-to-many matchings, stable outcomes exist if agents on both sides have path-independent choice functions. We show that stable outcomes exists if the agents on one side have outcast choice functions and the agents on another have path independent choice functions. All known results on existence of stable outcomes in many-to-many matchings follows from this result. Many-tomany matchings with contracts have stable outcomes under the same conditions. In order to prove our existence theorem, we introduce a new class of telescopic choice functions. We also consider non-symmetric blocking situations and prove that in such a case path-independence can be weakened.
    Date: 2016

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