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

  1. Why test the theory of incentives in a dynamic framework? By Magali Chaudey
  2. Market Power and Forward Prices By Ruddell, Keith; Downward, Tony; Philpott, Andy
  3. Contract (re-)negotiation with private and common values By Gretschko, Vitali; Wambach, Achim
  4. Supplier Search and Re-Matching in Global Sourcing: Theory and Evidence from China By Fabrice Defever; Christian Fischer; Jens Suedekum

  1. By: Magali Chaudey (Univ Lyon, UJM Saint-Etienne, GATE L-SE UMR 5824, F-42023 Saint- Etienne, France)
    Abstract: The recognition that contracts have a time dimension has given rise to an abundant literature since the end of the 1980s. In such a dynamic context, the contract may take place over several periods, and agents develop repeated interactions. Surprisingly, few papers have tried to apply the predictions of the dynamic theory incentives to data. However, taking a dynamic context into account can improve static empirical approaches by introducing new tools to distinguish between adverse selection and moral hazard, two asymmetrical contexts representative of the Principal–Agent model, or by solving the problem of endogeneity. A dynamic empirical approach also allows to renew the theoretical contract conception, and reveals some new features of contracts: memory, learning, and commitment.
    Keywords: Theory of incentives, Contract, Dynamics, Empirical Tests
    JEL: D86 D82 C13
    Date: 2017
  2. By: Ruddell, Keith (Research Institute of Industrial Economics (IFN)); Downward, Tony (University of Auckland); Philpott, Andy (University of Auckland)
    Abstract: We construct a model of strategic behavior in sequential markets which exhibits a persistent forward price premium. On the spot market, producers wield market power while purchasers are price takers. Producers with forward commitments have less incentive to raise prices on the spot market. Purchasers are thus willing to pay a premium to producers for forward contracts. We argue that this type of forward premium is not susceptible to arbitrage by speculators on the forward market, since purchasers prefer forward contracts backed by producers.
    Keywords: Forward pricing; Electricity markets; Market power; Arbitrage
    JEL: D43 G13 L12 L13 Q41
    Date: 2017–11–29
  3. By: Gretschko, Vitali; Wambach, Achim
    Abstract: We analyze the contracting problem of a principal who faces an agent with private information and cannot commit to not renegotiating a chosen contract. We model this by allowing the principal to propose new contracts any number of times after observing the contract choice of the agent. We propose a characterization of renegotiation-proof states of this (re-)negotiation and show that those states are supported by a perfect Bayesian equilibrium of an infinite horizon game. The characterization of renegotiation-proof states provides a tool, which is both powerful and simple to use, for finding such states in specific environments. We proceed by applying the results to adverse selection environments with private and common values. We show that with private values and common values of the "Spence" type only, fully efficient and separating states can be renegotiation-proof. With common values of the "Rothschild-Stiglitz" type inefficient and (partial) pooling states may be renegotiation-proof.
    Keywords: principal-agent models,renegotiation,Coase-conjecture
    JEL: C73 C78 D82
    Date: 2017
  4. By: Fabrice Defever; Christian Fischer; Jens Suedekum
    Abstract: In this paper, we consider a dynamic search-and-matching problem of a firm with its intermediate input supplier. In our model, a headquarter currently matched with a supplier, has an interest to find and collaborate with a more efficient partner. However, supplier switching through search and re-matching is costly. Given this trade-off between the fixed costs and the expected gains from continued search, the process will stop whenever the headquarter has found a sufficiently efficient supplier. Using firm-product-level data of fresh Chinese exporters to the United States, we obtain empirical evidence in line with the predictions of our theory. In particular, we find that the share of short-term collaborations is higher in industries with more supplier-cost dispersion, an indication of higher expected search opportunities.
    Keywords: input sourcing, relational contracts, supplier search
    JEL: F23 D23 L23
    Date: 2017–11

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