nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2017‒02‒12
four papers chosen by
Guillem Roig
University of Melbourne

  1. On the Equivalence of Bilateral and Collective Mechanism Design By Yu Chen
  2. Cost Uncertainty and Time Overruns in Public Procurement: a Scoring Auction for a Contract with Delay Penalties By Cesare Dosi; Michele Moretto
  3. Screening Multiple Uninformed Experts By Francisco Barreras
  4. Provider Incentives and Healthcare Costs: Evidence from Long-Term Care Hospitals By Liran Einav; Amy Finkelstein; Neale Mahoney

  1. By: Yu Chen (University of Graz)
    Abstract: We explore the theoretical justification of adopting bilateral mechanism design, which is a simplification of canonical collective mechanism design, in general multi-agency contracting games under Bayesian Nash equilibrium. We establish interim payoff equivalence between collective and bilateral mechanism design in the quasi-separable environment, in which inter- dependent valuations and correlated types are allowed. We employ interim payooff equivalence to further show the equivalence between optimal bilateral and collective mechanism design, when the principal's payoff exhibits certain relations with separate agents' payoffs. Our analysis can also incorporate individual rationality and budget balance constraints and the asymptotic equivalence.
    Keywords: Bayesian Nash equilibrium, bilateral mechanism, collective mechanism, interim payoff equivalence, quasi-separable environment
    JEL: C72 D82 D86
    Date: 2017–02
  2. By: Cesare Dosi (University of Padova and Centro di Ricerca Interuniversitario sull’Economia Pubblica (CRIEP)); Michele Moretto (University of Padova and Fondazione Eni Enrico Mattei (FEEM))
    Abstract: Drawing on the real-options theory we analyse bidding behaviour in a sealed-bid-first-score procurement auction where suppliers, facing variable production costs, must simultaneously report the contract price and the cost level at which they intend to perform the project. We show that this award mechanism is potentially able to maximize total welfare. Next we look at the time incentives required to ensure compliance with the promised optimal trigger value. We show that ex-post efficiency may call for delay penalties higher than the anticipated harm caused by time overruns, in so doing questioning the efficiency rationale of existing liquidated damages rules.
    Keywords: Public Procurement, Fixed-price Contracts, Real Options, Time Overruns, Scoring Auctions, Liquidated Damages
    JEL: C61 D44 D86 K12
    Date: 2017–01
  3. By: Francisco Barreras
    Abstract: Testing the validity of claims made by self-proclaimed experts can be impossible when testing them in isolation, even with infinite observations at the disposal of the tester. However, in a multiple expert setting it’s possible to design a contract that only informed experts accept and uninformed experts reject. The tester can pit competing theories against each other and take advantage of the uncertainty experts have about the other experts’ type. This contract will work even when there is only a single data point to evaluate.
    Keywords: Self-proclaimed, isolation, Uninformed Experts, uncertainty
    Date: 2017–01–24
  4. By: Liran Einav; Amy Finkelstein; Neale Mahoney
    Abstract: We study the design of provider incentives in the post-acute care setting – a high-stakes but under-studied segment of the healthcare system. We focus on long-term care hospitals (LTCHs) and the large (approximately $13,000) jump in Medicare payments they receive when a patient's stay reaches a threshold number of days. The descriptive evidence indicates that discharges increase substantially after the threshold, and that the marginal patient discharged after the threshold is in relatively better health. Despite the large financial incentives and behavioral response in a high mortality population, we are unable to detect any compelling evidence of an impact on patient mortality. To assess provider behavior under counterfactual payment schedules, we estimate a simple dynamic discrete choice model of LTCH discharge decisions. When we conservatively limit ourselves to alternative contracts that hold the LTCH harmless, we find that an alternative contract can generate Medicare savings of about $2,100 per admission, or about 5% of total payments. More aggressive payment reforms can generate substantially greater savings, but the accompanying reduction in LTCH profits has potential out-of-sample consequences. Our results highlight how improved financial incentives may be able to reduce healthcare spending, without negative consequences for industry profits or patient health.
    JEL: D22 I11 L21
    Date: 2017–01

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