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on Contract Theory and Applications |
| By: | Andrea Prat; Claudine Gartenberg; Steven Blader |
| Abstract: | This paper investigates how the success of a management practice depends on the nature of the long-term relationship between the firm and its employees. A large US transportation company is in the process of fitting its trucks with an electronic on-board recorder (EOBR), which provide drivers with information on their driving performance. In this setting, a natural question is whether the optimal managerial practice consists of: (1) Letting each driver know his or her individual performance only; or (2) Also providing drivers with information about their ranking with respect to other drivers. The company is also in the first phase of a multi-year initiative to remake its internal operations. This first phase corresponds to an overhaul of the relational contract with its employees, focusing exclusively on changing values toward a greater emphasis on teamwork and empowerment. The main result of our randomized experiment is that (2) leads to better performance than (1) in a particular site if and only if the site has not yet received the values intervention, and worse performance if it has. The result is consistent with the presence of a conflict between competition-based managerial practices and a cooperation-based relational contract. More broadly, it highlights the role of intangible relational factors in determining the optimal set of managerial practices. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:feb:natura:00553&r=cta |
| By: | E. Bacchiega; O. Bonroy; E. Petrakis |
| Abstract: | We study the optimal contract choice of an upstream monopolist producing an essential input that may sell to two vertically differentiated downstream firms. The upstream supplier can offer an exclusive contract to one of the firms or non-exclusive contracts to both firms. Each of the latter can be made contingent or not on the breakdown of the negotiations between the upstream supplier and the rival downstream firm. The distribution of bargaining power during the contract terms negotiations is the main driving force of the monopolist's choices. A powerful supplier always opts for an exclusive contract. By contrast, a weaker supplier offers non-exclusive contracts and makes each of them contingent or non-contingent such as to guarantee the most favorable outside option in its negotiations. Our main results hold under an horizontally differentiated downstream market too. |
| JEL: | D43 L13 L14 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp1079&r=cta |
| By: | Boyan Jovanovic; Julien Prat |
| 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. |
| JEL: | E32 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22703&r=cta |
| By: | Yildiz, Özgür |
| Abstract: | The German energy sector’s transition toward the more distributed production of energy has given rise to various forms of decentralized energy production. Within the framework of decentralized infrastructure, the relation between the involved agents is often characterized by a high degree of social proximity. Thus, the spatial and social closeness usually emphasizes aspects of decision-making such as pro-social behavior that can have significant effects on the involved parties’ response to agency problems and their investment incentives. This essay applies behavioral economics’ finding on so-called social preferences to fundamental insights from incomplete contract theory regarding economic agents’ investment behavior. Specifically, it will be analyzed how a contractor’s investment incentives develop in a public-private partnership setting given incomplete contracts when the contractor disposes of preferences for distributional fairness. It will be shown that the investment incentives of the contractor are significantly different from those of the standard model assuming neoclassical preferences. Another important finding is that in contrast to the standard model in which only the allocation of property rights can set different investment incentives, payments can also influence an economic agent’s behavior when social preferences apply as the distribution of payments determines whether the psychological influences of envy or a sense of guilt are affecting the contractor. |
| Keywords: | Incomplete contracts; public-private partnerships; fairness; social preferences; behavioral economics |
| JEL: | D02 D03 D23 L2 L32 |
| Date: | 2016–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:74552&r=cta |