nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2016‒10‒09
five papers chosen by
Guillem Roig
University of Melbourne

  1. Do Employers Learn from Public, Subjective, Performance Reviews? By Alex Wood-Doughty
  2. Reputation Cycles By Jovanovic, Boyan; Prat, Julien
  3. Relative Pay for Non-Relative Performance: Keeping up with the Joneses with Optimal Contracts By DeMarzo, Peter; Kaniel, Ron
  4. Gender, Group and Moral Hazard in Microfinance: Evidence from Matrilineal and Patrilineal Societies in India By Michael Price; Shagata Mukherjee
  5. Asymmetric Information and Middleman Margins: An Experiment with Indian Potato Farmers By Mitra, Sandip; Mookherjee, Dilip; Torero, Maximo; Visaria, Sujata

  1. By: Alex Wood-Doughty (Department of Economics, University of California, Santa Barbara, CA 93106)
    Abstract: Much of the new “gig economy” relies on reputation systems to reduce problems of asymmetric information. In most cases, these reputation systems function well by soliciting unbiased feedback from buyers and sellers. However, certain features of onlinelabor markets create incentives for employers to misreport worker performance. This paper tests whether employers learn about worker productivity from public, subjective, performance reviews using data from a large online labor market. Starting with a simple model of employer learning in the presence of potentially biased reviews, I derive testable hypotheses about the relationship between public information and wages, worker attrition, and contract renewals. I find that these public reviews provide substantial information to the market and that other firms use them to learn about the productivity of workers. I also find evidence that these reviews affect how long workers stay in the labor market. Finally, using data on applications, I provide evidence of a mechanism for honest reviews. I show that workers punish firms that leave negative reviews by refusing to work for them again. Together, this body of evidence suggests that reputation systems in online labor markets provide significant information to both workers and firms and help reduce problems of asymmetric information.
    Keywords: online labor markets; reputation systems; employer learning
    JEL: D82 D83 J31 J49
    Date: 2016–09
  2. By: Jovanovic, Boyan; Prat, Julien
    Abstract: This paper shows that endogenous cycles can arise when contracts between firms and their customers are incomplete and when products are experience goods. Then firms invest in the quality of their output in order to establish a good reputation. Cycles arise because investment in reputation causes self-fulfilling changes in the discount factor. Cycles are more likely to occur when information diffuses slowly and consumers exhibit high risk aversion. A rise in idiosyncratic uncertainty is of two kinds that work in opposite ways: Noise in observing effort is contractionary as it generally is in agency models. But a rise in the variance of the distribution of abilities is expansionary. A calibrated version produces realistic fluctuations in terms of peak-to-trough movements in consumption and the spacing of time between recessions.
    Keywords: Endogenous Fluctuations; Intangible Capital; reputation
    JEL: E22 E32 L14
    Date: 2016–09
  3. By: DeMarzo, Peter; Kaniel, Ron
    Abstract: We consider a multi-agent contracting setting when agents derive utility based in part on their pay relative to their peers. Because agents' productivity is affected by common as well as idiosyncratic shocks, it is optimal to base pay on the agent's performance relative to a benchmark of his peers. But when agents have "keeping up with the Joneses" (KUJ) preferences and care about how their pay compares to that of others, relative performance evaluation also increases agents' perceived risk. We show that when a single principal (or social planner) can commit to a public contract, the optimal contract hedges the risk of the agent's relative wage without sacrificing efficiency. While output is unchanged, however, hedging makes the contracts appear inefficient in the sense that performance is inadequately benchmarked. We also show that when there are multiple principals, or the principal is unable to commit, efficiency is undermined. In particular, KUJ effects induce agents to be more productive, but average wages increase even more, reducing firm profits. We also show that if the principal cannot commit not to privately renegotiate contracts, then wages and effort are increased when KUJ effects are weak, but are reduced, enhancing efficiency, when KUJ effects are sufficiently strong. Finally, public disclosure of contracts across firms can cause output to collapse.
    Keywords: contract; Joneses; manager; pay performance; relative
    Date: 2016–09
  4. By: Michael Price; Shagata Mukherjee
    Abstract: This study takes a first step to advance our understanding of the strategic interaction between the constituent components of default in microfinance and how to mitigate them. We conduct controlled microfinance field experiments in rural India to provide a systematic analysis of the relationship between gender, group liability and moral hazard. By varying the contract structure across different microfinance games, our experiment decomposes the two moral hazard (ex-ante and ex-post) channels and find that their effect on default are counteractive rather than additive for women clients. The study facilitates heterogeneity analysis of gender on moral hazard across comparable matrilineal and patrilineal societies in two neighboring states of India. We find that matrilineal women are less risk averse and are more likely to invest in the risky project (ex-ante moral hazard) than women in patrilineal societies. Moreover, we find a reversal of gender effect on strategic default (ex-post moral hazard) across the two societies, suggesting the importance of social norms and gender roles on financial behavior. Our results indicate that policymaking in microfinance should be designed by considering the heterogeneity of diverse societies, gender roles, norms and the underlying socio-economic factors that motivate financial behavior among borrowers.
    Date: 2016
  5. By: Mitra, Sandip; Mookherjee, Dilip; Torero, Maximo; Visaria, Sujata
    Abstract: In the Indian state of West Bengal, potato farmers sell to local middlemen because they lack direct access to wholesale markets. High-frequency marketing surveys reveal large middleman margins and negligible pass-through from wholesale to farmgate prices. Farmers are uninformed about downstream wholesale and retail prices.To test alternative models of farmer-middlemen trades, we conduct a field experiment where farmers in randomly chosen villages are provided with wholesale price information. Information had negligible average effects on farmgate sales and revenues, but increased pass-through from wholesale to farmgate prices. These results are consistent with a model of ex post bargaining between farmers and village middlemen where farmers also have the option of selling to other middlemen outside the village. They are inconsistent with models of risk-sharing contracts between middle-men and farmers, standard oligopolistic models of pass-through or search frictions.
    Keywords: cellphones; Middlemen; Pass-Through; price information; supply chains
    JEL: L14 O12
    Date: 2016–09

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