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on Contract Theory and Applications |
| By: | ATTAR Andrea (Università di Roma Tor Vergata, and Toulouse School of Economics); d’ASPREMONT Claude (Université catholique de Louvain, CORE, Belgium) |
| Abstract: | We study trading situations in which several principals on one side of the market compete to serve privately informed agents on the other side. In such ‘generalized screening’ settings, competitors may post mechanisms instead of prices, and the enforceability and the efficiency of the contractual relationships become difficult to evaluate. We revisit these issues, focusing on three applications: bilateral (or multilateral) trade, where all traders have private information, auctions and insurance, where incomplete information is one-sided. In the first part, as a benchmark, we focus on the standard mechanism design approach with only one principal, the “mechanism designer", and we rely on the revelation principle as a device to characterize equilibrium out- comes. Even then, first-best optimality, combined with Bayesian incentive compatibility and interim individual rationality might be difficult to obtain, as illustrated by Myerson and Satterthwaite (1983) impossibility result, for- mulated for risk-neutral traders with independent beliefs. In auctions, if the buyers types are correlated à la Crémer and McLean (1985,1988), this impos- sibility can be bypassed and the seller can extract the whole surplus. In the more general multilateral trade setting, a simple modification of a condition provided by d’Aspremont and Gérard-Varet (1982) allows to implement any distribution of the surplus (Kosenok and Severinov, 2008). However, under risk-aversion, only second-best outcomes can be implemented, as originally shown by Stiglitz (1977) for the monopolistic case, and by Crocker and Snow (1985) for the competitive one. In the second part, we consider a class of extensive form games in which several principals (with no private information) compete over mechanisms in the presence of privately informed agents. Applying the standard reve- lation principle becomes problematic, as first pointed out by Peck (1997): there exist equilibrium outcomes that can be supported by general commu- nication mechanisms, but not by simple direct ones. We revisit a relevant implication of this impossibility, i.e. the recent folk-theorem-like result of Yamashita (2010): if there are at least three agents, a large set of incentive compatible allocations can be supported at equilibrium. For the result to hold, principals have to rely on message spaces that are larger than the cor- responding agentsÕ type spaces. In the single agent (or common agency) case, the equilibrium analysis can be further simplified using the delegation principle (Peters, 2001, Martimort and Stole, 2002). In this context, we stress the key role played by the possibility to enforce exclusivity clauses. In standard exclusive competition settings (as Rothchild and Stiglitz, 1976), if a pure strategy equilibrium exists, it is second-best efficient (Crocker and Snow, 1985). This is no longer true under nonexclusive competition. In this case, the possibility to complement his rivals’ offers, creates new strategic opportunities for sellers, and crucially modifies equilibrium outcomes: Attar et al. (2014) establish that, in any pure strategy equilibrium, at most one type of agent is actively trading. The impossibility to enforce exclusive trad- ing may further restrict the set of incentive feasible allocations. The recent work of Attar et al. (2016b) characterizes the constraints faced by a planner who does not have access to agents’ private information, and cannot prevent agents’ from engaging in further trades with sellers. They show that this side-trading opportunity dramatically restricts the set of allocations that are available to a planner. As a matter of fact there is only one incentive com- patible allocation that is robust to the possibility of sellers’ side trades. This prevents any redistribution between different types of (privately informed) buyers. |
| Keywords: | Mechanism design, Bilateral Trade, Competing Mechanism, Constrained Efficiency, Adverse Selection |
| JEL: | D43 D82 D86 |
| Date: | 2017–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2017009&r=cta |
| By: | Strausz, Roland (Humboldt University Berlin) |
| Abstract: | Crowdfunding provides innovation in enabling entrepreneurs to contract with consumers before investment. Under aggregate demand uncertainty, this improves screening for valuable projects. Entrepreneurial moral hazard and private cost information threatens this benefit. Crowdfunding\'s after-markets enable consumers to actively implement deferred payments and thereby manage moral hazard. Popular crowdfunding platforms offer schemes that allow consumers to do so through conditional pledging behavior. Efficiency is sustainable only if expected returns exceed an agency cost associated with the entrepreneurial incentive problems. By reducing demand uncertainty, crowdfunding promotes welfare and complements traditional entrepreneurial financing, which focuses on controlling moral hazard. |
| Keywords: | Crowdfunding; entrepreneurship; moral hazard; demand uncertainty; |
| JEL: | D82 G32 L11 M31 |
| Date: | 2017–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:2&r=cta |
| By: | Herweg, Fabian (University of Bayreuth); Schmidt, Klaus M. (University of Munich) |
| Abstract: | For the procurement of complex goods the early exchange of information is important to avoid costly renegotiation. If the buyer can specify the main characteristics of possible design improvements in a complete contingent contract, a scoring auction implements the efficient allocation. If this is not feasible, the buyer must choose between a price-only auction (discouraging early information exchange) and bilateral negotiations with a preselected seller (reducing competition). Bilateral negotiations are superior if potential design improvements are important, if renegotiation is particularly costly, and if the buyer\'s bargaining position is strong. Moreover, negotiations provide stronger incentives for sellers to investigate design improvements. |
| Keywords: | Adaptation costs; auctions; behavioral contract theory; loss aversion; negotiations; procurement; renegotiation; ; |
| JEL: | D03 D82 D83 H57 |
| Date: | 2017–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:12&r=cta |
| By: | SCHOLZ Eva-Marie (Université catholique de Louvain, CORE, Belgium) |
| Abstract: | In this paper, we study the relationship between capacity constraints and licensing strategies. To doso, we focus on the licensing strategy of an outside innovator who licenses a process innovation to the downstream sector of a vertical Cournot oligopoly. Downstream firms soruce an essential production factor from a capacity constrained upstream sector. In this setting, we show that the innovator optimally licenses large innovations via per-unit royalty contracts and small innovations via fixed fee contracts. Moreover, an increase in the strength of the capacity constraints makes it more likely that hte optimal licensing contract includes a strictly positive per-unit royalty rate. As a final point, we discuss the relationship between capacity constraints and the social optimality of the innovator’s licensing strategy as measured by aggregate welfaore or the diffusion of the innovation on the downstream market |
| Keywords: | capacity constraints; licensing contracts, vertical Cournot oligopoly |
| JEL: | D43 L13 |
| Date: | 2017–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2017004&r=cta |
| By: | Heitor Almeida; Kristine Watson Hankins; Ryan Williams |
| Abstract: | Purchase obligations are forward contracts with suppliers and are used more broadly than traded commodity derivatives. This paper is the first to document that these contracts are a risk management tool and have a material impact on corporate hedging activity. Firms that expand their risk management options following the introduction of steel futures contracts substitute financial hedging for purchase obligations. Contracting frictions – such as bargaining power and settlement risk – as well as potential hold-up issues associated with relationship-specific investment affects the use of purchase obligations in the cross-section as well as how firms respond to the introduction of steel futures. |
| JEL: | G32 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23331&r=cta |
| By: | Fahn, Matthias (LMU Munich); Schwarz, Marco A. (LMU Munich) |
| Abstract: | We analyze how agents\' present bias affects optimal contracting in an infinite-horizon employment setting. The principal maximizes profits by offering a menu of contracts to naive agents: a virtual contract - which agents plan to choose in the future - and a real contract which they end up choosing. This virtual contract motivates the agent and allows the principal to keep the agent below his outside option. Moreover, under limited liability, implemented effort can be inefficiently high. With a finite time horizon, the degree of exploitation of agents decreases over the life-cycle. While the baseline model abstracts from moral hazard, we show that the result persists also when allowing for non-contractible effort. |
| Keywords: | Employment relations; dynamic contracting; present bias; |
| JEL: | D03 D21 J31 M52 |
| Date: | 2017–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:6&r=cta |
| By: | Salvador Bertomeu; Daniel Camos-Daurella; Antonio Estache |
| Abstract: | This paper shows that the creation of an independent regulatory agency (IRA) is often not a necessary or sufficient condition to help countries attract private participation in the operation and financing of the water and sanitation sector of developing countries. The odds of an impact are, however, significantly higher for Latin American and Caribbean countries and to a lesser extent Eastern European countries, than for any other region. Higher income levels and higher prices are also correlated with a higher effectiveness of IRAs in attracting private sector financing. The analysis of the impact on the various types of PPP contracts shows that, at the margin, IRAs are irrelevant in general, to the contract choice, except for greenfield projects for which IRAs may be counterproductive at the margin. |
| Keywords: | regulation; regulatory agencies; water utilities; privatization; public-private partnerships |
| JEL: | L33 L38 L43 L51 L95 L97 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/250182&r=cta |