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on Contract Theory and Applications |
| By: | Akira Okada (Kyoto University) |
| Abstract: | While the theory of incomplete contracts has contributed greatly to our understanding many topics such as the nature and financial struc- ture of the firm, its rigorous foundation has been debated. Maskin and Tirole (1999) show that the usual "observable but not verifiable" as- sumption is not sufficient for the incomplete contract to be optimal, provided that parties can commit themselves not to renegotiate. We show that the assumption is not necessary, either. In sequential bar- gaining where parties can write a contract contingent on (ex post) veri- fiable variables, an equilibrium contract turns out to be a null contract (the ex post Nash bargaining solution). A key to our result is endoge- nous revealing of private information during contract negotiations. The possibility of renegotiations is irrelevant. |
| Keywords: | incomplete contract; ex post Nash bargaining solution; information revealing; sequential bargaining; verifiability |
| JEL: | C72 C78 D82 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:982&r=cta |
| By: | N. Packham |
| Abstract: | In a continuous-time setting where a risk-averse agent controls the drift of an output process driven by a Brownian motion, optimal contracts are linear in the terminal output; this result is well-known in a setting with moral hazard and -under stronger assumptions - adverse selection. We show that this result continues to hold when in addition reservation utilities are type-dependent. This type of problem occurs in the study of optimal compensation problems involving competing principals. |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1801.04080&r=cta |
| By: | Englmaier, Florian (LMU Munich); Fahn, Matthias (JKU Linz) |
| Abstract: | The corporate finance literature documents that managers tend to over-invest in their companies. A number of theoretical contributions have aimed at explaining this stylized fact, most of them focusing on a fundamental agency problem between shareholders and managers. The present paper shows that over-investments are not necessarily the (negative) consequence of agency problems between shareholders and managers, but instead might be a second-best optimal response to address problems of limited commitment and limited liquidity. If a firm has to rely on relational contracts to motivate its workforce, and if it faces a volatile environment, investments into general, non-relationship-specific, capital can increase the efficiency of a firm\'s labor relations. |
| Keywords: | relational contracts; corporate finance; capital investments; |
| JEL: | C73 D21 D86 G32 |
| Date: | 2018–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:62&r=cta |
| By: | Ottorino Chillemi (University of Padova); Stefano Galavotti (University of Padova); Benefetto Gui (Unviersity of Padova) |
| Abstract: | We study a contractual design problem between a seller and a buyer where some information correlated with the buyer's valuation is publicly observed ex-post and the allocation, but not payments, can be made contingent on it. Our analysis shows that, to maximize her profit, the seller should offer one contract in which the good is transferred to the buyer only if the ex-post signal turns out to be bad; this generates inefficient rationing: some buyers with low valuation are assigned the good more often than others with higher valuation. We show that, in contrast with previous results, the optimal contract may decrease social welfare relative to the case in which no signal is available (or it is not used). We apply our model to interpret two real-world situations: internet plans with bandwidth caps for mobile phones and promotion schemes in organizations with exogenously fixed wages. |
| Keywords: | rationing, ex-post information, mechanism design. |
| JEL: | D82 D86 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0214&r=cta |
| By: | Akira Okada (Kyoto University) |
| Abstract: | We present a non-cooperative sequential bargaining game for side payments contracting. Players voluntarily participate in negotiations. If any player does not participate, then renegotiation will take place in the next round, given an on-going contract. We show that if the stop- ping probability of negotiations is sufficiently small, then there exists an efficient Markov perfect equilibrium where all players immediately par- ticipate in negotiations and agree to the Nash bargaining solution. The efficiency result is strengthened by the asymptotically efficient one that in every Markov perfect equilibrium, all players participate in negotia- tions through a process of renegotiations in the long run with probability one. Finally, we illustrate international negotiations for climate change as an application of the result. |
| Keywords: | Coase theorem, contract, efficiency, externality, Nash bar- gaining solution, non-cooperative bargaining, side payments |
| JEL: | C71 C72 C78 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:983&r=cta |