nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2016‒10‒23
five 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. Oliver Hart and Bengt Holmström: Contract Theory By Committee, Nobel Prize
  3. Asymmetric information in automobile insurance: Evidence from driving behavior By Kremslehner, Daniela; Muermann, Alexander
  4. Pre-commercial Procurement, Procurement of Innovative Solutions and Innovation Partnerships in the EU: Rationale and Strategy By Elisabetta Iossa, Federico Biagi and Paola Valbonesi
  5. Retail Channel Management in Consumer Search Markets By Garcia, Daniel; Janssen, Maarten

  1. By: Brice Corgnet (EMLYON Business school - EMLYON Business School, GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - UCBL - Université Claude Bernard Lyon 1 - UL2 - Université Lumière - Lyon 2 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - ENS Lyon - École normale supérieure - Lyon); Joaquín Gómez-Miñambres (Chapman University - Chapman University, Bucknell University); Roberto Hernán-Gonzalez (Nottingham University Business School - UON - University of 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
    Date: 2016
  2. By: Committee, Nobel Prize (Nobel Prize Committee)
    Abstract: An eternal obstacle to human cooperation is that people have di§erent interests. In modern societies, conflicts of interests are often mitigated -- if not completely resolved -- by contractual arrangements. Well-designed contracts provide incentives for the contracting parties to exploit the prospective gains from cooperation. For example, labor contracts include pay and promotion conditions that are designed to retain and motivate employees; insurance contracts combine the sharing of risk with deductibles and co-payments to encourage clients to exercise caution; credit contracts specify payments and decision rights aimed at protecting the lender, while encouraging sound decisions by borrowers.
    Keywords: Contract theory;
    JEL: D86
    Date: 2016–10–10
  3. By: Kremslehner, Daniela; Muermann, Alexander
    Abstract: Based on a unique data set of driving behavior we find direct evidence that private information has significant effects on contract choice and risk in automobile insurance. The number of car rides and the relative distance driven on weekends are significant risk factors. While the number of car rides and average speeding are negatively related to the level of liability coverage, the number of car rides and the relative distance driven at night are positively related to the level of first-party coverage. These results indicate multiple and counteracting effects of private information based on risk preferences and driving behavior.
    Date: 2016
  4. By: Elisabetta Iossa, Federico Biagi and Paola Valbonesi
    Abstract: We consider alternative European public procurement mechanisms for acquiring R&D services and innovative solutions, focusing on Pre-commercial Procurement, Public Procurement of Innovative Solutions and Innovation Partnerships. For each of these mechanisms, we identify conceptually strengths and weaknesses. We highlight the role played by (i) economies of scope and externalities between R&D and large-scale production; (ii) degree of specificity of the innovation; (iii) role of SMEs in the market and level of market competition; (iv) risk of market foreclosure and supplier lock-in. This article contributes to the literature on incentives in demand-side innovation policy by tapping into the contractual design features and by offering relevant implications for academics and policy makers.
    Keywords: Innovation, Demand-side policies, Incentives, Pre-commercial Procurement, Public Procurement of Innovative Solutions, Innovation Partnership.
    JEL: O31 O32 O38 H57
    Date: 2016
  5. By: Garcia, Daniel; Janssen, Maarten
    Abstract: We study how a monopoly manufacturer optimally manages her contractual relations with retailers in markets with consumer search. By choosing wholesale prices, the manufacturer affects the degree of competition between retailers and the incentives of consumers to search. We show that depending on whether or not the manufacturer can commit to her price decisions and on the search cost, the manufacturer may be substantially better off choosing her wholesale prices not independent of each other, consciously allowing for asymmetric contracts. Thus, our analysis may shed light on when we may expect sales across different retailers to be positively or negatively correlated. Our model may be able to generate loss leaders at the wholesale level and show the rationale for creating ”premium resellers”.
    Keywords: Consumer Search, Retailing, Pricing
    JEL: D43 L13 M30
    Date: 2016–10–09

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.