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on Contract Theory and Applications |
| By: | Bardey, David; De Donder, Philippe; Mantilla, Cesar |
| Abstract: | We compare two genetic testing regulations, Disclosure Duty (DD) and Consent Law (CL), in an environment where individuals choose to take a genetic test or not. DD forces agents to reveal the test results to their insurers, resulting in a discrimination risk. CL allows agents to withhold that information, generating adverse selection. We complement our model with an experiment. We obtain that a larger fraction of agents test under CL than under DD, and that the proportion of individuals preferring CL to DD is non-monotone in the test cost when adverse selection is set endogenously at its steady state level. |
| Keywords: | Consent Law, Disclosure Duty, Personalised Medicine, Test take up rate, pooling health insurance contracts |
| JEL: | C91 D82 I18 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:31557&r=cta |
| By: | Bonatti, Alessandro; Hörner, Johannes |
| Abstract: | This paper analyzes the impact of market structure on career concerns. Effort increases the probability that a skilled agent achieves a one-time breakthrough. Wages are based on assessed ability and on expected output. For any wage, the agent works too little, too late. Under short-term contracts, effort and wages are single-peaked with seniority, due to the strategic substitutability of effort levels at different times. Both delay and underprovision of effort worsen if effort is observable. Commitment to wages by competing firms mitigates these inefficiencies. In that case, the optimal contract features piecewise constant wages and severance pay. |
| Keywords: | career concerns, experimentation, career paths, up-or-out, reputation. |
| JEL: | D82 D83 M52 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:31604&r=cta |
| By: | Sebastian Heise |
| Abstract: | Economists have long suspected that firm-to-firm relationships might increase price rigidity due to the use of explicit or implicit fixed-price contracts. Using transaction-level import data from the U.S. Census, I study the responsiveness of prices to exchange rate changes and show that prices are in fact substantially more responsive to these cost shocks in older versus newly formed relationships. Based on additional stylized facts about a relationship's life cycle and interviews I conducted with purchasing managers, I develop a model in which a buyer-seller pair subject to persistent, stochastic shocks to production costs shares profit risk under limited commitment. Once structurally estimated, the model replicates the empirical correlation between relationship age and the responsiveness of prices to shocks. My results suggest that changes to the average length of relationships in the economy -e.g., in a recession, when the share of young relationships declines- can influence price flexibility and hence the effectiveness of monetary policy. |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:17-33&r=cta |
| By: | Ramana Nanda (Harvard Business School, Entrepreneurial Management Unit); Matthew Rhodes-Kropf (Massachusetts Institute of Technology) |
| Abstract: | An extensive literature on venture capital has studied asymmetric information and agency problems between investors and entrepreneurs, examining how separating entrepreneurs from the investor can create frictions that might inhibit the funding of good projects. It has largely abstracted away from the fact that a startup typically does not have just one investor, but several VCs that come together in a syndicate to finance a venture. In this chapter, we therefore argue for an expansion of the standard perspective to also include frictions within VC syndicates. Put differently, what are the frictions that arise from the fact that there is not just one investor for each venture, but several investors with different incentives, objectives and cash flow rights, who nevertheless need to collaborate to help make the venture a success? We outline the ways in which these coordination frictions manifest themselves, describe the underlying drivers and document several contractual solutions used by VCs to mitigate their effects. We believe that this broader perspective provides several promising avenues for future research. |
| Keywords: | venture capital, syndication, networks, entrepreneurship |
| JEL: | G24 K22 L14 M52 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:17-089&r=cta |
| By: | A. Mitchell Polinsky; Steven Shavell |
| Abstract: | The theory of insurance is considered here when an insured individual may be able to sue another party for the losses that the insured suffered—and thus when an insured has a potential source of compensation in addition to insurance coverage. Insurance policies reflect this possibility through so-called subrogation provisions that give insurers the right to step into the shoes of insureds and to bring suits against injurers. We show that subrogation provisions are a fundamental feature of optimal insurance contracts because they relieve litigation-related risks and result in lower premiums—financed by the litigation income of insurers. This income includes earnings from suits that insureds would not otherwise have brought. We also characterize optimal subrogation provisions in the presence of loading costs, moral hazard, and non-monetary losses. |
| JEL: | G22 K13 K41 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23303&r=cta |
| By: | Constantino Hevia (Universidad Torcuato di Tella); Norman Loayza (The World Bank); Claudia Meza-Cuadra (The World Bank) |
| Abstract: | This paper presents an analytical framework that captures the informational problems and trade-offs that policy makers face when choosing between public goods (e.g., infrastructure) and industrial policies (e.g., firm or sector-specific subsidies). After a discussion of the literature, we set up the model economy, consisting of a government and a set of heterogeneous firms. We first present the first-best allocation (under full information) of government resources among firms. We then introduce uncertainty by restricting information regarding firm productivity to be private to the firm. We develop an optimal contract (which replicates the first best) consisting of a tax-based mechanism that induces firms to reveal their true productivity. As this requires high government capacity, we consider other simpler policies. We conclude that providing public goods is likely to dominate industrial policies under most scenarios, especially when government capacity is low. |
| Keywords: | Industrial Policy, Public Goods, Uncertainty, Private Information, Firm Subsidies and Taxes |
| JEL: | H2 H4 O1 O2 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:2017-093&r=cta |