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on Contract Theory and Applications |
| By: | Qi Liu; Lei Lu; Bo Sun |
| Abstract: | This paper studies a principal-agent model in which the information on future firm performance is ambiguous and the agent is averse to ambiguity. We show that if firm risk is ambiguous, while stocks always induce the agent to perceive a high risk, options can induce him to perceive a low risk. As a result, options can be less costly in incentivizing the agent than stocks in the presence of ambiguity. In addition, we show that providing the agent with more incentives would induce the agent to perceive a higher risk, and there is a discontinuous jump in the compensation cost as incentives increase, which makes the principal reluctant to reset contracts frequently when underlying fundamentals change. Thus, compensation contracts exhibit an inertia property. Lastly, the model sheds some light on the use of relative performance evaluation, and provides a rationale for the puzzle of pay-for-luck in the presence of ambiguity. |
| Keywords: | Ambiguity ; Executive compensation ; Options ; Relative performance evaluation |
| JEL: | G30 J33 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1195&r=cta |
| By: | Anatoli Segura (Bank of Italy) |
| Abstract: | At the beginning of the recent financial crisis, sponsoring banks rescued their structured investment vehicles (SIVs) despite having no contractual obligation to do so. I show that this outcome may arise as the equilibrium of a signaling game between banks and their debt investors when a negative shock affects the correlated asset returns of a fraction of banks and their sponsored vehicles. A rescue is interpreted as a good signal and reduces the refinancing costs of the sponsoring bank. If banks leverage is high or the negative shock is sizeable enough, the equilibrium is a pooling one in which all banks rescue. When the aggregate financial sector is close to insolvency, banks expected net worth would increase if rescues were banned. The model can be extended to discuss the circumstances in which all banks collapse after rescuing their vehicles. |
| Keywords: | reputation risk, rescues, mispricing, implicit support, shadow banking system |
| JEL: | G2 G3 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1100_17&r=cta |
| By: | Elisabetta Iossa (CEIS & DEF, University of Rome "Tor Vergata",Proxenter,CEPR,IEFE-Bocconi); Michael Waterson (University of Warwick) |
| Abstract: | Under recurrent procurement, the awarding of a contract to a firm may put it in an advantageous position in future tenders, which may reduce competition over time. The objective of this paper is to study the dynamics of competition for tendered contracts, focusing on factors that may generate incumbent advantage. Particular attention is given to learning economies, sunk costs of entry and switching costs for the procurer. The paper then applies these insights to analyse empirically the evolution of competition in the market for local bus services in London. |
| Keywords: | Dynamic Competition, Procurement and Incumbent advantage |
| JEL: | L24 L92 L40 |
| Date: | 2017–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:400&r=cta |
| By: | Picariello, Luca (Dept. of Economics, Norwegian School of Economics and Business Administration) |
| Abstract: | Workers can move across firms and take with them portable skills. This has an impact on how firms are organized and allocate tasks across workers. To reduce mobility, a profit maximizing firm may inefficiently allocate talented workers on tasks that reduce their outside option. In the existing literature, asymmetric information about workers' talents makes this retention strategy profitable, although inefficient. In this paper we let workers' skills be observable across firms, but task allocation to be non-contractible. Inefficient assignment of tasks to workers persists in this environment. We show that by organizing a firm as an equity-partnership, in which the total profit is shared, the efficient task allocation can be implemented and profit increased. This result is attained through shifting control rights to workers that become partners and decide over task allocation. Both partners and workers are retained in equilibrium. This paper provides a new rationale for the widespread presence of partnerships in human-capital intensive industries. |
| Keywords: | Task Allocation; Retention; Compensation Contracts; Partnerships |
| JEL: | D86 J24 J54 M52 |
| Date: | 2017–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhheco:2017_002&r=cta |
| By: | Gaetano Alfredo Minerva (University of Bologna and Centro Studi Luca d’Agliano) |
| Abstract: | In the model by Grossman and Helpman (2002) no industry has both vertically integrated and specialized producers in equilibrium. I generalize their model by assuming that final goods producers (irrespective of whether they are vertically integrated with the upstream stage or specialized in the downstream stage only) need a basket of differentiated commodities, in addition to labor, as a fixed requirement for production. I then show the existence of an equilibrium populated simultaneously by vertically integrated and disintegrated firms. |
| Keywords: | Vertical integration; Outsourcing; Vertical linkages; Industry equilibrium; Contractual |
| JEL: | D23 D43 L24 |
| Date: | 2017–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:csl:devewp:411&r=cta |