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on Contract Theory and Applications |
| By: | Blouin, Arthur; Macchiavello, Rocco |
| Abstract: | This paper studies strategic default on coffee pre-financing agreements. In these common arrangements, mills finance coffee production through loans backed by forward-sales contracts with foreign buyers. We model how strategic default introduces a trade-off between insurance and counterparty risk: relative to indexed contracts, fixed-price contracts insure against price swings but create incentives to default when market conditions change. To test for strategic default, we construct contract-specific measures of unanticipated changes in market conditions by comparing spot prices at maturity with the relevant futures prices at the contracting date. Unanticipated rises in market prices increase defaults on fixed price contracts but not on price-indexed ones. We isolate strategic default by focusing on unanticipated rises at the time of delivery after production decisions are sunk. Estimates suggest that roughly half of the observed defaults are strategic. Strategic defaults are more likely in less valuable relationships which, in turn, tend to sign price-indexed contracts to limit strategic default. A model calibration suggests that strategic default causes 15.8\% average losses in output, significant dispersion in the marginal product of capital and sizeable negative externalities on supplying farmers. |
| Keywords: | Contractual Forms; Counterparty Risk; Strategic Default |
| JEL: | D22 G32 L14 O16 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12307&r=cta |
| By: | Jean Guillaume Forand; Jan Zapal |
| Abstract: | We characterise the optimal demand and supply of favours in a dynamic principal-agent model of joint production, in which heterogenous project opportunities arrive stochastically and are publicly observed upon arrival, utility from these projects is non-transferable and commitment to future production is limited. Our results characterise the optimal dynamic contract, and we establish that the principal's supply of favours (the production of projects that benefit the agent but not the principal) is backloaded, that the principal's demand for favours (the production of projects that benefit the principal but not the agent) is frontloaded, and that the production of projects is ordered by their comparative advantage, that is, by their associated efficiency in extracting (for demanded projects) and providing (for supplied projects) utility to the agent. Furthermore, we provide an exact construction of the optimal contract when project opportunities follow a Markov process. |
| Keywords: | dynamic contracts; trading favours; team production |
| JEL: | D86 C73 L24 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp605&r=cta |
| By: | Richard T. Thakor; Andrew W. Lo |
| Abstract: | We develop a theory of optimal financing for R&D-intensive firms that uses their unique features—large capital outlays, long gestation periods, high upside, and low probabilities of R&D success—that explains three prominent stylized facts about these firms: their relatively low use of debt, large cash balances, and underinvestment in R&D. The model relies on the interaction of the unique features of R&D-intensive firms with three key frictions: adverse selection about R&D viability, asymmetric information about the upside potential of R&D, and moral hazard from risk shifting. We establish the optimal pecking order of securities with direct market financing. Using a tradeoff between tax benefits and the costs of risk shifting for debt, we establish conditions under which the firm uses an all-equity capital structure and firms raise enough financing to carry excess cash. A firm may use a limited amount of debt if it has pledgeable assets in place. However, market financing still leaves potentially valuable R&D investments unfunded. We then use a mechanism design approach to explore the potential of intermediated financing, with a binding precommitment by firm insiders to make costly ex post payouts. A mechanism consisting of put options can be used in combination with equity to eliminate underinvestment in R&D relative to the direct market financing outcome. This optimal intermediary-assisted mechanism consists of bilateral “insurance” contracts, with investors offering firms insurance against R&D failure and firms offering investors insurance against very high R&D payoffs not being realized. |
| JEL: | D82 D83 G31 G32 G34 O31 O32 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23831&r=cta |
| By: | Olivier Goudet (SMA - Systèmes Multi-Agents - LIP6 - Laboratoire d'Informatique de Paris 6 - UPMC - Université Pierre et Marie Curie - Paris 6 - CNRS - Centre National de la Recherche Scientifique); Gérard Ballot (CRED - Centre de Recherches en Economie et Droit - UP2 - Université Panthéon-Assas - M.E.N.E.S.R. - Ministère de l'Éducation nationale, de l’Enseignement supérieur et de la Recherche); Jean-Daniel Kant (SMA - Systèmes Multi-Agents - LIP6 - Laboratoire d'Informatique de Paris 6 - UPMC - Université Pierre et Marie Curie - Paris 6 - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | The Fixed Duration Contracts (FDC) have taken an importance place in the European labor markets, notably in France and Spain. They represent a dominant share of the hires, although most workers hold an Open Ended Contract (OEC) at any given date. There is then a permanent coexistence of the two types of contract that we explain through a trade-off that firms compute between their costs and benefits when deciding to open a vacancy. For the first time are taken simultanously into account for the OEC the firing costs, the advance notice costs, and the losses when the firm is unable to meet the legal requirements to initiate economic dismissals. For the FDC, the specific costs are the termination costs and the waiting cost when a new FDC cannot be opened immediately after a termination. Training and vacancy costs are common to both contracts and included but they are amortized over very different durations among the two contracts and these costs influence the trade-off. We extend WorkSim, an agent-based model of the French labor market which reproduces the gross flows of workers between the different states, employment (FDC and OEC), unemployment and inactivity. The theoretical framework is the costly search by the heterogenous agents, firms and individuals, who interact on the market, taking rationally bounded decisions but learning from their mistakes. The competition takes place in a labor stock-flow consistent framework, taking into account crowding out effects. The model is scaled and calibrated through a poweful algorithm to reach a steady state which reproduces the main observed variables in the labor market in the year 2011 with a correct fit. We generate the main effects of FDC, churning, screening, stepping stone, but also model in detail the buffer effect which is built on an option into an intertemporal decision framework with idiosyncratic anticipations of firms demand. The results of the sensitivity analysis show that pessimistic anticipations and the volatility of demand shocks raise the recourse to FDC but also unemployment. Increasing firing costs also raises unemployment but not in very significant way. Forbidding FDC does not change the employment significantly since the opposite effects of FDC seem to compensate each other. While the model puts into a unified framework the main theoretical ideas that yield the trade-off between FDC and OEC, and can be applied to different countries, it also offers sufficent detail to allow for labor market policy discussion in a given country. |
| Keywords: | contract choice,employment contract,agent-based model,Labor market,France |
| Date: | 2015–09–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01512938&r=cta |