nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2017‒09‒10
four papers chosen by
Guillem Roig
University of Melbourne

  1. Incomplete Contracts, Shared Ownership, and Investment Incentives By Schmitz, Patrick W.
  2. Intangible Assets and the Organization of Global Supply Chains By S. Bolatto; A. Naghavi; G. Ottaviano; K. Zajc Kejzar
  3. Optimal Licensing of Technology in the Face of (Asymmetric) Competition By Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter
  4. Governing supply relationships: evidence from the automotive industry By Alexander Schmitt; Jo Van Biesebroeck

  1. By: Schmitz, Patrick W.
    Abstract: Consider a partnership consisting of two symmetrically informed parties who may each own a share of an asset. It is ex post efficient that tomorrow the party with the larger valuation gets the asset. Yet, today the parties can make investments to enhance the asset's productivity. Contracts are incomplete, so today only the ownership structure can be specified, which may be renegotiated tomorrow. It turns out that shared ownership is often optimal. If the investments are embodied in the physical asset, it may be optimal that party B has a larger ownership share even when party A has a larger valuation and a better investment technology. When shared ownership is taken into account, joint ownership in the sense of bilateral veto power cannot be optimal, regardless of whether the investments are in human capital or in physical capital.
    Keywords: Incomplete Contracts; Investment incentives; partnership dissolution; Property rights; shared ownership
    JEL: C78 D23 D86 L24 O32
    Date: 2017–08
  2. By: S. Bolatto; A. Naghavi; G. Ottaviano; K. Zajc Kejzar
    Abstract: This paper introduces the concept of intangible assets in sequential supply chains and the importance of their appropriability in the organizational decision of firms. We focus on the quality of intellectual property rights (IPR) institutions, which on top of the hold-up problem between a supplier and the final producer entails an additional risk of imitation as technology may leak to competing producers in the market. The level of IPR enforcement in the location of a supplier can therefore play a crucial role in determining the decision of a final good producer whether to outsource or integrate a particular stage of production. The analysis is performed with Antràs and Chor (2013) in the background, where the position of the input along the supply chain, i.e. its upstreamness, and the degree of sequential complementarity of stage-specific inputs influence the organizational strategy of firms through the incentive structure of supplier investments. Our findings show that introducing intangible assets in sequential supply chain may have the opposite effect of contractibility on outsourcing decision, where only tangible property rights are considered. We argue therefore that the risk of imitation is a relevant feature that needs to be accounted for in the incomplete contract literature. Our theoretical predictions are validated on Slovenian firm-level data.
    JEL: F12 F14 F21 F23 D23 L22 L23 L24 O34
    Date: 2017–08
  3. By: Cuihong Fan (Shanghai University of Finance and Economics); Byoung Heon Jun (Department of Economics, Korea University, Seoul, Republic of Korea); Elmar G. Wolfstetter (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: We reconsider the optimal licensing of technology by an incumbent firm in the presence of multiple potential licensees. In a first step we show that competition among potential licensees has a drastic effect on optimal two-part tariff contracts. We then introduce more general mechanisms and design a dynamic mechanism that extracts the maximum industry profit while reducing the potential licensees' payoff to the minimum level that they can assure themselves. That mechanism can be viewed as a generalized "chutzpah" mechanism, generalized because it employs royalties to maximize the industry profit. It awards licenses to all firms and prescribes maximum permitted royalty rates plus positive fixed fees.
    Keywords: Patent licensing, innovation, optimal contracts, dynamic mechanisms.
    JEL: D21 D43 D44 D45
    Date: 2017
  4. By: Alexander Schmitt; Jo Van Biesebroeck
    Abstract: A large empirical literature analyzes determinants of the make-or-buy decision. Transaction cost economics highlights the role of asset specificity, the property rights theory focuses on the relative marginal contributions to joint surplus creation, and some evidence suggests that making transactions more contractible facilitates outsourcing. We use a unique transaction-level dataset of outsourced automotive components to predict carmakers’ choices between four distinct ways of organizing sourcing relationships. We derive conditional predictions for three characteristics: (i) the complexity or contractibility of a transaction, (ii) how objectively codifiable performance is, and (iii) the supplier’s capabilities. For example, while dominant buyer investments might predict vertical integration, as in the property rights theory, other characteristics might convince a buyer to simply re-organize the collaboration with the supplier in a more suitable way. Our results suggest that “buy” relationships differ systematically and that the predictive power of our variables extend from the make-or-buy decision to how-to-buy.
    Date: 2017–08

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