nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2017‒10‒08
four papers chosen by
Guillem Roig
University of Melbourne

  1. A Note on the Multi-Agent Contracts in Continuous Time By Qi Luo; Romesh Saigal
  2. Envy in Mission-Oriented Organizations By F. Barigozzi; E. Manna
  3. Finite Horizon Holdup and How to Cross the River By Simon Martin; Karl H. Schlag
  4. Gift exchange vs. repeated interaction as a source of reciprocal behavior By Fahn, Matthias; Schade, Anne; Schüßler, Katharina

  1. By: Qi Luo; Romesh Saigal
    Abstract: Dynamic contracts with multiple agents is a classical decentralized decision-making problem with asymmetric information. In this paper, we extend the single-agent dynamic incentive contract model in continuous-time to a multi-agent scheme in finite horizon and allow the terminal reward to be dependent on the history of actions and incentives. We first derive a set of sufficient conditions for the existence of optimal contracts in the most general setting and conditions under which they form a Nash equilibrium. Then we show that the principal's problem can be converted to solving Hamilton-Jacobi-Bellman (HJB) equation requiring a static Nash equilibrium. Finally, we provide a framework to solve this problem by solving partial differential equations (PDE) derived from backward stochastic differential equations (BSDE).
    Date: 2017–10
  2. By: F. Barigozzi; E. Manna
    Abstract: According to the labor donation theory, workers adhering to their firms' mission are willing to donate a portion of their paid labor. In this paper, we study how workers' fairness concerns limit the firm's ability to extract labor donation from its employees. We find that, in sectors where the firm's mission is important, optimal contracts are such that high-ability employees perceive their wage as less fair than low-ability employees and they must be rewarded with an “envy rent". The opposite is true in sectors where the firm's mission does not play a relevant role. We empirically test the predictions of the model using the German Socio-Economic Panel finding support for our theoretical results.
    JEL: D03 D82 M54
    Date: 2017–10
  3. By: Simon Martin; Karl H. Schlag
    Abstract: When should one pay the ferryman? When should one pay for delivery of a good if there are no institutions or these are too costly to enforce contracts? We suggest to break up the transaction into many small rounds of investment and payment. We show that the e?cient investment can be implemented in an e-subgame perfect equilibrium for any given e if there are su?ciently many rounds of investment. This shows that when the horizon is ?nite, the holdup problem that emerges from backwards induction is not robust. Equilibria with stable and robust strategies require more periods.
    JEL: D23 C72 L14
    Date: 2017–09
  4. By: Fahn, Matthias; Schade, Anne; Schüßler, Katharina
    Abstract: Humans reciprocate. We want to return favors we have received, but also respond appropriately to behavior that we regard as unfair against us. Whereas previous research has typically tried to isolate the most prominent explanations for reciprocal behavior - inherent preferences for reciprocity and repeated interaction - the present paper addresses the question if and how those interact. Developing a theoretical model of a long-term employment relationship, we first show that reciprocal preferences are more important when an employee is close to retirement. At earlier stages, repeated interaction is more important because more future rents (which increase players’ commitment in this case) can be used to provide incentives. Preferences for reciprocity still affect the structure of an employment relationship early on, though, because of two reasons. First, preferences for reciprocity effectively reduce the employee’s effort costs. Second, they allow to relax the enforceability constraint that determines the principal’s commitment in the repeated interaction. We test our main predictions using data from the German Socio-Economic Panel (SOEP) and find cross-sectional evidence for a stronger positive effect of positive reciprocity on effort and wages for older workers.
    Keywords: reciprocity,relational contracts,dynamic incentives
    JEL: C73 D03 D21 D22 D86
    Date: 2017

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