nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2017‒01‒29
five papers chosen by
Guillem Roig
University of Melbourne

  1. Mission Drift in Microcredit and Microfinance Institution Incentives By Sara Biancini; David Ettinger; Baptiste Venet
  2. Property as sequential exchange: The forgotten limits of private contract By Benito Arruñada
  3. Diversification and Screening By Guido Maretto
  4. Bank monitoring incentives under moral hazard and adverse selection By Nicol\'as Hern\'andez Santib\'a\~nez; Dylan Possama\"i; Chao Zhou
  5. Price Volatility in Commodity Markets with Restricted Participation By Knauth, Andreas; Paschmann, Martin

  1. By: Sara Biancini (Universite de Caen Normandie, CREM); David Ettinger (Universite Paris Dauphine, PSL, LEDa and CEREMADE); Baptiste Venet (
    Abstract: We analyze the relationship between Micro nance Institutions (MFIs) and external donors, with the aim of contributing to the debate on \mission drift" in micro nance. We assume that both the donor and the MFI are pro-poor, possibly at different extents. Bor- rowers can be (very) poor or wealthier (but still unbanked). Incentives have to be provided to the MFI to exert costly effort to identify the more valuable projects and to choose the right share of poorer borrowers (the optimal level of poor outreach). We rst concentrate on hidden action. We show that asymmetric information can distort the share of very poor borrowers reached by loans, thus increasing mission drift. We then concentrate on hidden types, assuming that MFIs are characterized by unobservable heterogeneity on the cost of effort. In this case, asymmetric information does not necessarily increase the mission drift. The incentive compatible contracts push efficient MFIs to serve a higher share of poorer borrowers, while less efficient ones decrease their poor outreach.
    Keywords: Microfinance, Donors, Poverty, Screening.
    JEL: O12 O16 G21
    Date: 2017–01
  2. By: Benito Arruñada
    Abstract: The contractual, single-exchange framework in Coase (1960) contains the implicit assumption that exchange in property rights does not affect future transaction (i.e., trading) costs. This is pertinent for analyzing use externalities but limits our understanding of property institutions: a central problem of property markets lies in the interaction among multiple transactions, which causes exchange-related and non-contractible externalities. By retaining a single-exchange simplification, the economic analysis of property has encouraged views that: (1) overemphasize the initial allocation of property rights, while some form of recurrent allocation is often needed; (2) pay scant attention to legal rights, although these determine enforceability and, therefore, economic value; and (3) overestimate the power of unregulated private ordering, despite its inability to protect third parties. These three biases have been misleading policy in many areas, including land titling and business firm formalization.
    Keywords: property rights, externalities, enforcement, transaction costs, public ordering, private ordering, impersonal exchange, organized markets, blockchain.
    JEL: D23 K11 K12 L85 G38 H41 O17 P48
    Date: 2017–01
  3. By: Guido Maretto
    Abstract: I study two-way effects between financial markets and contractual agreements with a risk sharing component, such as compensation packages within a firm, or mortgages and loans. I construct a model with many Units, in each of which one of the contracting individuals, the Agent, has private information, while the uninformed individual, the Principal, has the opportunity to trade with the Principals in other Units. I give general conditions under which financial markets induce a transfer of risk from Agents to Principals. I also show how asymmetric information interacts with financial markets through two channels. First, the distortion of the allocation of the high risk Agents, feeds back in the market portfolio increasing risk on markets, and in the contracts of the low risk Agents. Secondly, markets change the Principals' screening problem preventing low risk Agents from enjoying an information rent. The model results can explain empirical evidence from the subprime mortgage market during the securitization boom leading to the 2008 financial crisis and suggest further implications for other markets segment. JEL codes:
    Date: 2017
  4. By: Nicol\'as Hern\'andez Santib\'a\~nez; Dylan Possama\"i; Chao Zhou
    Abstract: In this paper, we extend the optimal securitization model of Pag\`es [41] and Possama\"i and Pag\`es [42] between an investor and a bank to a setting allowing both moral hazard and adverse selection. Following the recent approach to these problems of Cvitani\'c, Wan and Yang [12], we characterize explicitly and rigorously the so-called credible set of the continuation and temptation values of the bank, and obtain the value function of the investor as well as the optimal contracts through a recursive system of first-order variational inequalities with gradient constraints. We provide a detailed discussion of the properties of the optimal menu of contracts.
    Date: 2017–01
  5. By: Knauth, Andreas (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)); Paschmann, Martin (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))
    Abstract: Analyzing commodity market dynamics, we observe that price volatility increases with reduced contract duration. In this paper, we derive a theoretical model depicting the price formation in two markets with altering product granularity. Supplemented by empirical evidence from German electricity markets for hourly and quarter-hourly products, we find that the high price volatility is triggered by restricted participation of suppliers in the market for quarter-hourly products as well as by sub-hourly variations of renewable supply and demand. Welfare implications reveal efficiency losses of EUR 96 million in 2015 that may be reduced if markets are coupled.
    Keywords: Commodity Markets; Price Volatility; Sequential Market Organization; Short-Term Market Dynamics; Electricity Market Interaction; Short-Term Price Formation
    JEL: C13 C51 D44 D47 L94 Q21 Q41
    Date: 2017–01–19

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