nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2018‒01‒08
eight papers chosen by
Guillem Roig
University of Melbourne

  1. Enforcing Public-Private Partnership Contract: How do Fiscal Institutions Matter? By Manabu Nose
  2. On the psychological motives of economic performance By Gonzalez Jimenez, Victor
  3. On Private Communication in Competing Mechanism Games By Andrea Attar; Eloisa Campioni; Gwenaël Piaser
  4. The Effect of Bank Monitoring on the Demand for Earnings Quality in Bond Contracts By Akinobu Shuto; Norio Kitagawa; Naoki Futaesaku
  5. Dynamic competition in deceptive markets By JOHNEN, Johannes
  6. Consumer Preferences and Soft Load Control on the Swedish Electricity Market By Broberg, Thomas; Brännlund, Runar; Persson, Lars
  7. Supplier Search and Rematching in Global Sourcing - Theory and Evidence from China By Fabrice Defever; Christian Fischer; Jens Suedekum
  8. Does a Short-Term Increase in Incentives Boost Performance? By Angelova, Vera; Giebe, Thomas; Ivanova-Stenzel, Radosveta

  1. By: Manabu Nose
    Abstract: Public-private partnerships (PPPs) have increased rapidly in emerging and developing countries, creating both opportunities and fiscal challenges. One of the main challenges is that while governments have increased commitments in guarantees and direct subsidies to promote PPPs, contractual disputes remain high with significant costs. This paper examines how fiscal institutions affect the selection of PPP contracts and the probability of contract disputes using about 6,000 PPP contract-level data. The analysis shows that larger government financing needs, lower budget transparency and bureaucratic efficiency are associated with higher probability for governments to offer guarantees. Propensity score matching results show that disputes are more common for guaranteed contracts due to adverse selection and contingent liability effects. PPP management quality and budget transparency are found to be key determinants for a longer survival of PPPs.
    Date: 2017–11–15
  2. By: Gonzalez Jimenez, Victor (Tilburg University, School of Economics and Management)
    Abstract: This dissertation consists of four chapters in behavioral economics. Chapters 2 and 3 study the psychological effects of poverty and low social status, and their influence on individual attainment and economic performance. The main message of these chapters is that disadvantaged individuals in the society, may exhibit suboptimal economic performance due to the psychological component associated to their position in the society, rather than for their abilities or their material constraints. Chapters 4 and 5, study incentive schemes that exploit behavioral biases to motivate the individual. The idea is to design cost-efficient contracts, whose novelty does not rely on the monetary incentives that they deliver, but on the usage of psychological regularities at the benefit of the employer. The contract studied in Chapter 4 features the formation of reference points through the elicitation of a production threshold. This contract takes advantage of the psychological loss that the individual feels from falling short of her target. The contract studied in Chapter 5, exploits the regularity that individuals overweight small probabilities, by implementing random performance evaluations. These incentives deliver higher economic outcomes, than standard pay-for-performance contracts.
    Date: 2017
  3. By: Andrea Attar (Toulouse School of Economics and CEIS & DEF University of Rome Tor Vergata); Eloisa Campioni (CEIS & DEF, University of Rome "Tor Vergata"); Gwenaël Piaser (Ipag Business School Paris)
    Abstract: We study competing mechanism games in which principals simultaneously design contracts to deal with several agents. We show that principals can profit from privately communicating with agents by generating incomplete information in the continuation game they play. Specifically, we construct an example of a complete information game in which none of the (multiple) equilibria in Yamashita (2010) survives against unilateral deviations to mechanisms involving private communication. This also contrasts with the robustness result established by Han (2007). The role of private communication we document may call for extending the standard construction of Epstein and Peters (1999) to incorporate this additional element.
    Date: 2017–12–16
  4. By: Akinobu Shuto (Associate Professor, Graduate School of Economics, The University of Tokyo (E-mail:; Norio Kitagawa (Associate Professor, Graduate School of Business Administration, Kobe University (E-mail:; Naoki Futaesaku (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: We investigate whether bank monitoring that relies on private information in private debt decreases the demand for earnings quality in public debt. In doing so, we focus on Japanese main banks that have high abilities to access the private information of borrowing firms. We find that under stable financial conditions in the bond-issuing firms, accruals quality is negatively associated with bond yield spreads, regardless of the existence of a main bank, suggesting that reporting higher quality earnings affects the reduction of the cost of debt in public debt. In contrast, we find that when the bond-issuing firms with a main bank have high default risk, there is no relationship between accruals quality and bond yield spread. The results suggest that when a main bank has a stronger incentive to monitor their borrowing firms due to the firm's poor financial performance, the increased bank monitoring using private information decreases the demand for earnings quality in bond contracts.
    Keywords: Accruals Quality, Bond Yield Spread, Main Bank, Private Information, Japan
    JEL: M41
    Date: 2017–12
  5. By: JOHNEN, Johannes (CORE, Université catholique de Louvain)
    Abstract: In many deceptive markets, firms design contracts to exploit mistakes of naive consumers. These contracts also attract less profitable sophisticated consumers. I study such markets when firms compete repeatedly and gather usage data about their customers which is informative about the likelihood of a customer being sophisticated. I show in a benchmark model that firms do not benefit from private information in this setting when all consumers are rational. I find that in sharp contrast to a model with only rational consumers, this customer information mitigates competition and is of great value to its owner despite intense competition. I discuss several implications of the value of customer information on naiveté. Private information on customers’ sophistication induces profits that are bell-shaped in the share of naive consumers. Firms prefer an even mix of both customer types. I also show that if firms can educate (some) naives about hidden fees, competition is already mitigated when firms compete for customers with initially symmetric information. I analyze a policy that discloses customer information to all firms and thereby increases consumer surplus. I discuss how the UK governments’ midata program might induce crucial aspects of this policy, and illustrate the obustness of results through several extensions.
    Keywords: Consumer mistakes, deceptive products, shrouded attributes, big data, targeted pricing, consumer data, add-on pricing, price discrimination, industry dynamics
    JEL: C22 C58
    Date: 2017–12–20
  6. By: Broberg, Thomas (CERE and the Department of Economics, Umeå University); Brännlund, Runar (CERE and the Department of Economics, Umeå University); Persson, Lars (CERE and the Department of Economics, Umeå University)
    Abstract: The main purpose of the present report is to present the results of the project "The electricity customer, a new power on the electricity market?" The main purpose of the project is to estimate lost values due to various restrictions on household electricity consumption, which gives us "prices" of schematic reductions in power through behavioral adaptations among Swedish households. Another purpose is to estimate households' costs for short power outages, which gives a "price" of a targeted disconnection of electricity. The willingness of households to adjust their electricity consumption is governed by several factors - both economic and non-economic. An additional objective is therefore to analyze the extent to which households are willing to adapt for non-economic reasons, for example, to facilitate the integration of renewable electricity production such as solar and wind power. To achieve the objectives of the project, we analyze household habits and preferences for electricity usage in connection with daily demand peaks during winter time in Sweden. We have chosen an empirical approach where households are subjected to choose between hypothetical electricity contracts where different types of restrictions in the use of large-scale household appliances are included. The different characteristics of the agreements or contracts relate to (1) maximum power usage in watts, (2) the duration of the restriction, (3) number of occasions of restriction and (4) the ability to change the selection of which electrical appliances to be used during the restriction. In addition to the above-mentioned approach, we also study how this relates to other electricity usage (e.g. heating, lighting, TV, etc.). This is done by asking households for compensation requirements to accept full power outages, i.e. black-outs. By studying the difference in compensation requirements between the "soft" limitation and the black-outs, the value of different loads can be estimated. The results reveal that households on average require a compensation of SEK 2000 - 3700 depending on the severity of electricity consumption constraint. Depending on how we define the potential loss in potential electricity usage for different scenarios, the results can be translated to be between SEK 20 and 40 per kWh. In the case of total power outages, the valuation is significantly higher and corresponds to SEK 3000 to 4600. This can in turn be translated to the equivalent of SEK 400 - 600 per kWh. The results thus indicate a significant difference between the value of the load in a soft control DSM program, and the remaining load (e.g. heating, lighting and TV). Compared to previous literature on the value of lost load, VOLL, our estimates fall in the higher range, especially compared to Swedish studies. We believe this is in line with the context outlined in the present study with rather many occasions of disruptions at the peak demand hour. The results also show that a pro-environmental cheap talk make people more likely to opt into a DSM program with load controlled at many occasions. It did not, however, make people see more lenient on hard load controls in general. An immediate policy implication from the results is that specific policies aiming at stimulating behavioral changes probably are very ineffective and/or costly. As a result, policies to affect demand response should focus on automatization and passive response. A related policy implication is that it is far from obvious that demand response is always more cost effective than supply response, i.e., increasing production of electricity.
    Keywords: Demand flexibility; choice experiment; electricity market; load control
    JEL: Q41 Q42 Q50
    Date: 2017–12–08
  7. 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
  8. By: Angelova, Vera (TU Berlin); Giebe, Thomas (Linnaeus University); Ivanova-Stenzel, Radosveta (TU Berlin)
    Abstract: If agents are exposed to continual competitive pressure, how does a short-term variation of the severity of the competition affect agents\' performance? In a real-effort laboratory experiment, we study a one-time increase in incentives in a sequence of equally incentivized contests. Our results suggest that a short-term increase in incentives induces a behavioral response but does not boost total performance.
    Keywords: contest; tournament; real-effort; experiment; contract theory; forward-looking;
    JEL: C91 D91 J22 J33
    Date: 2017–12–28

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