nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2016‒10‒30
five papers chosen by
Guillem Roig
University of Melbourne

  1. Contract contingency in vertically related markets By Bacchiega, Emanuele; Bonroy, Olivier; Petrakis, Emmanuel
  2. Resource Agency Relationship with Privately Known Exploration and Extraction Costs By François Castonguay; Pierre Lasserre
  3. Grantbacks, Territorial Restraints, and the Type of Follow-On Innovation: The "But for..." Defense By Ambashi, Masahito; Régibeau, Pierre; Rockett, Katharine
  4. Cost efficiency of smallholder payment for ecosystem services (PES) scheme in rural Kenya By Benjamin, Emmanuel Olatunbosun; Sauer, Johannes
  5. Vertical Information Restraints: Pro- and Anti-Competitive Impacts of Minimum Advertised Price Restrictions By Asker, John; Bar-Isaac, Heski

  1. By: Bacchiega, Emanuele; Bonroy, Olivier; Petrakis, Emmanuel
    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.
    Keywords: Vertical relationships, exclusive vs. non-exclusive relationships, contract contingency, two-part tariff, product differentiation, International Relations/Trade,
    Date: 2016
  2. By: François Castonguay; Pierre Lasserre
    Abstract: We analyze exploration and extraction under asymmetric information. The principal delegates the exploitation of a resource to an agent (a mining firm) who possesses private information about the cost of exploration and learns further extraction cost information once reserves have been established and constrain extraction. The principal can only commit to current period royalty contracts: one discovery-transfer menu; one extraction-royalty menu conditional on reserves discovered. Compared with the symmetric information first best, avoiding adverse selection in extraction requires the optimum mechanism to increase discoveries by the lowest cost type and possibly others. This is tempered by a countervailing effect stemming from information asymmetry in exploration which tends to reduce discoveries, especially by higher cost types. We further detail implications on the forms taken by the inefficiencies associated with asymmetric information: abandoned reserves, excessive use of low-cost exploration prospects, and inefficient levels of technological sophistication in exploration and extraction sectors.
    Keywords: Nonrenewable resources; asymmetric information; endogenous stock of resource; incentive mechanisms,
    JEL: D82 H21 L72 Q38
    Date: 2016–10–25
  3. By: Ambashi, Masahito; Régibeau, Pierre; Rockett, Katharine
    Abstract: We analyse the effect of grantback clauses in licensing contracts. While competition authorities fear that grantback clauses might decrease the licensee's ex post incentives to innovate, a standard defence is that grantback clauses are required for the patent-owner to agree to license its technology in the first place. We examine the validity of this "but for" defense and the equilibrium effect of grantback clauses on the innovation incentives of the licensee for both non-severable and severable innovations. Under the 2004 EU Technology Transfer Guidelines, and the guidelines for some other jurisdictions, grantback clauses that apply to "non-severable" (read "infringing") innovations are considered to be less controversial than clauses that apply to "severable" innovations.. We show, to the contrary, that grantback clauses do not increase the patent-holder's incentives to license when non-severable innovations are at stake but they do when severable innovations are concerned - suggesting that the "but fo" defense might be valid for severable innovations but not for non-severable ones. Moreover we show that, for severable innovations, grantback clauses can increase the range of parameters for which follow-on innovation by the licensee occurs.
    Keywords: grantbacks; innovation; licensing
    JEL: K21 L24 O31
    Date: 2016–10
  4. By: Benjamin, Emmanuel Olatunbosun; Sauer, Johannes
    Abstract: Smallholder farmers in sub-Saharan Africa that sequestrate carbon through agroforestry provide ecosystem services that generate payment for ecosystem services (PES). When these farmers are inadequately compensated for the provision of additional ecosystem services they have no incentive to participate while over-compensation may lead to inefficient schemes. Stakeholders must consider farm-level interactions between agricultural production and ecosystem services’ provision when evaluating the adequate level of compensation and efficiency of PES scheme. We address this by measuring the marginal cost of ecosystem services based on farm level bio-economic interactions. A classification of the relationship between marketed agricultural output and non-marketed ecosystem services into complementary, supplementary or competitive is conducted. We use the flexible transformation function for our theoretical analysis and surveyed 120 smallholder farmers receiving PES for agroforestry carbon sequestration in Kenya. The results suggest that the joint production for a number of smallholder farms in Kenya may not be of a complementary nature. PES schemes could be designed in a more efficient manner if they would target smallholder farms based on the aforementioned classification by offering a range of contracts to encourage competitive bidding.
    Keywords: Cost-efficiency, PES, agroforestry, smallholders, Kenya, Environmental Economics and Policy, Farm Management, Land Economics/Use,
    Date: 2016
  5. By: Asker, John; Bar-Isaac, Heski
    Abstract: We consider vertical contracts where the retail market may involve search frictions. Minimum advertised price restrictions (MAP) act as a restraint on customers' information and so can increase search frictions in the retail sector. Such restraints, thereby, soften retail competition - an impact also generated by resale price maintenance (RPM). However, by accommodating (consumer or retailer) heterogeneity, MAP can allow for higher manufacturer profits than RPM. We show that they can do so through facilitating price discrimination among consumers; encouraging service provision; and facilitating manufacturer collusion. Thus, welfare effects may be positive or negative compared to RPM or to the absence of such restrictions.
    Date: 2016–10

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