nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2017‒11‒12
seven papers chosen by
Guillem Roig
University of Melbourne

  1. Contracting with Word-of-Mouth Management By Yuichiro Kamada; Aniko Ory
  2. How is the Trade-off between Adverse Selection and Discrimination Risk Affected by Genetic Testing? Theory and Experiment By David Bardey; Philippe De Donder; Cesar Mantilla
  3. Firm heterogeneity and the integration trilemma: The utility of Joint ventures in integration versus outsourcing models By Charlie Joyez
  4. Governing together: An international review of contracts across levels of government for regional development By Claire Charbit; Oriana Romano
  5. Delegating performance evaluation By Igor Letina; Shuo Liu; Nick Netzer
  6. Forward Contracts, Market Structure, and the Welfare Effects of Mergers By Nathan Miller; Joseph Podwol
  7. Multiproduct Intermediaries and Optimal Product Range By Rhodes, Andrew; Watanabe, Makoto; Zhou, Jidong

  1. By: Yuichiro Kamada (Haas School of Business, University of California Berkeley); Aniko Ory (Cowles Foundation, Yale University)
    Abstract: We incorporate word of mouth (WoM) in a classic Maskin-Riley contracting problem, allowing for referral rewards to senders of WoM. Current customers’ incentives to engage in WoM can affect the contracting problem of a firm in the presence of positive externalities of users. We fully characterize the optimal contract scheme and provide comparative statics. In particular, we show that offering a free contract is optimal only if the fraction of premium users in the population is small. The reason is that by offering a free product, the firm can incentivize senders to talk by increasing expected externalities that they receive and this is effective only if there are many free users. This result is consistent with the observation that companies that successfully offer freemium contracts oftentimes have a high percentage of free users.
    Keywords: Word-of-mouth, referral rewards, freemium, contract theory
    JEL: D82 L21 M3
    Date: 2016–07
  2. By: David Bardey; Philippe De Donder; Cesar Mantilla
    Abstract: We compare two genetic testing regulations, Disclosure Duty (DD) and Consent Law (CL), in an environment where individuals choose to take a genetic test or not. DD forces agents to reveal the test results to their insurers, resulting in a discrimination risk. CL allows agents to withhold that information, generating adverse selection. We complement our model with an experiment. We obtain that a larger fraction of agents test under CL than under DD, and that the proportion of individuals preferring CL to DD is non-monotone in the test cost when adverse selection is set endogenously at its steady state level.
    Keywords: consent law, disclosure duty, personalized medicine, test take up rate, pooling health insurance contracts
    JEL: C91 D82 I18
    Date: 2017
  3. By: Charlie Joyez (Université Paris-Dauphine, PSL Research University,IRD, LEDa, DIAL)
    Abstract: The traditional Grossman-Hart-Moore (GHM) property right theory of the ?rm does not consider shared ownership as an optimal solution because of the incentive loss it would be responsible for. This paper examines the rationale for speci?c cases of shared ownership: International Joint Ventures (JVs), with heterogeneous ?rms in various host-countries. Speci?cally, we built a theoretical model that extends the Antr`as & Helpman (2008) integration dilemma under partially incomplete contracts to international joint-ventures. These turn to be the optimal ownership structure in two different cases. Speci?cally, for medium-productive ?rms when the most productive would opt for full integration. More interestingly JVs turns to be the optimal ownership choice, even for most productive ?rms in countries with lower quality of contractual institutions. The model insists then on the interaction between ?rm-level and country-level parameters, with higher productivity giving increasing access to higher ownership share in countries with stronger contractual enforceability.
    Keywords: Property Right Theory; Asset Ownership; Shared Ownership; International Joint Ventures.
    JEL: D23 L24
    Date: 2017–10
  4. By: Claire Charbit (OECD); Oriana Romano (OECD)
    Abstract: Contracts are a key tool for vertical co-ordination, enabling dialogue and capacity building across levels of government. They are frequently used for regional development policy in OECD and non-OECD countries. Drawing on contract theory and a variety of national experiences, this paper identifies three main types of contracts between central and subnational governments according to their objectives: i) empowerment; ii) delegation; and iii) policy-sharing contracts. The differentiation of contracts depending on their objective is based on two key factors: the maturity of decentralisation and the capacity of national and subnational governments. It is expected that with the development of subnational /central government capacities (or both), and with the increasing maturity of decentralisation, contracts can shift from one type to another. The paper concludes by suggesting enforcement mechanisms for more effective contracts across levels of government.
    Keywords: contract theory, contracts, enforcement, multi-level governance, regional development
    JEL: H5 H7 K12 R1 R5
    Date: 2017–11–10
  5. By: Igor Letina; Shuo Liu; Nick Netzer
    Abstract: We study optimal incentive contracts with multiple agents when performance evaluation is delegated to a reviewer. The reviewer may be biased in favor of the agents, but the degree of the bias is unknown to the principal. We show that a contest, which is a contract in which the principal determines a set of prizes to be allocated to the agents, is optimal. By using a contest, the principal can commit to sustaining incentives despite the reviewer’s potential leniency bias. The optimal effort profile can be uniquely implemented by an all-pay auction with a cap, and it can also be implemented by a nested Tullock contest. Our analysis has implications for applications as diverse as the design of worker compensation, the awarding of research grants, and the allocation of foreign aid.
    Keywords: Performance evaluation, delegation, optimality of contests
    JEL: D02 D82 M52
    Date: 2017–10
  6. By: Nathan Miller (Georgetown University); Joseph Podwol (U.S. Department of Justice)
    Abstract: We examine how forward contracts affect economic outcomes under generalized market structures. In the model, forward contracts discipline the exercise of market power by making profit less sensitive to changes in output. This impact is greatest in markets with intermediate levels of concentration. Mergers reduce the use of forward contracts in equilibrium and, in markets that are sufficiently concentrated, this ampli-fies the adverse effects on consumer surplus. Additional analyses of merger profitability and collusion are provided. Throughout, we illustrate and extend the theoretical re-sults using Monte Carlo simulations. The results have practical relevance for antitrust enforcement.
    Date: 2017–10
  7. By: Rhodes, Andrew; Watanabe, Makoto; Zhou, Jidong
    Abstract: This paper develops a framework for studying the optimal product range choice of a multiproduct intermediary when consumers demand multiple products. In the optimal product selection, the intermediary uses exclusively stocked high-value products to increase store traffic, and at the same time earns profit mainly from non-exclusively stocked products which are relatively cheap to buy from upstream suppliers. By doing this the intermediary can earn strictly positive profit, including in situations where it does not improve efficiency in selling products. A linkage between product selection and product demand features such as size and shape is established. It is also shown that relative to the social optimum, the intermediary tends to be too big and stock too many products exclusively.
    Keywords: intermediaries, product range, multiproduct demand, search, exclusive contracts
    JEL: D83 L42 L81
    Date: 2017–10

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