nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2017‒07‒30
three papers chosen by
Guillem Roig
University of Melbourne

  1. Asymmetric Information and the Property Rights Approach to the Theory of the Firm By Schmitz, Patrick W.
  2. Contracting with Feedback By Bo Sun
  3. Manufacturer collusion: Strategic implications of the channel structure By Reisinger, Markus; Thomes, Tim Paul

  1. By: Schmitz, Patrick W.
    Abstract: In the Grossman-Hart-Moore property rights approach to the theory of the firm, it is usually assumed that information is symmetric. Ownership matters for investment incentives, provided that investments are partly relationship-specific. We study the case of completely relationship-specific investments (i.e., the disagreement payoffs do not depend on the investments). It turns out that if there is asymmetric information, then ownership matters for investment incentives and for the expected total surplus. Specifically, giving ownership to party B can be optimal, even when only party A has to make an investment decision and even when the owner's expected disagreement payoff is larger under A-ownership.
    Keywords: Incomplete Contracts; Investment incentives; private information; Property rights; relationship specificity
    JEL: D23 D82 D86 L23 L24
    Date: 2017–07
  2. By: Bo Sun (Federal Reserve Board)
    Abstract: We study the effect of financial market conditions on managerial compensation structure. First, we analyze the optimal pay-for-performance in a model in which corporate decisions and firm value are both endogenous to trading due to feedback from information contained in stock prices. In a less frictional financial market, the improved information content of stock prices helps guide managerial decisions, and this information substitutes out part of direct incentive provision in compensation contracts. Thus, the optimal pay-for-performance is lowered in response to reductions in market frictions. Second, we test our theory using two quasi-natural experiments and find evidence that is consistent with the theory. Our results indicate that the financial market environment plays an important role in shaping CEO compensation structure.
    Date: 2017
  3. By: Reisinger, Markus; Thomes, Tim Paul
    Abstract: We investigate how the structure of the distribution channel affects tacit collusion between manufacturers. When selling through a common retailer, we find - in contrast to the conventional understanding of tacit collusion that firms act to maximize industry profits - that colluding manufacturers strategically induce double marginalization so that retail prices are above the monopoly level. This lowers industry profits but increases the profit share that manufacturers appropriate from the retailer. Comparing common distribution with independent (exclusive) distribution, we show that the latter facilitates collusion. Despite this result, common retailing leads to lower welfare because a common retailer monopolizes the downstream market. For the case of independent retailing, we also demonstrate that contract offers that are observable to the rival retailer are not necessarily beneficial for collusive purposes.
    Keywords: tacit collusion,contract observability,common retailing,independent (exclusive) retailing,two-part tariffs,wholesale price contracts
    Date: 2017

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