nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2018‒02‒12
five papers chosen by
Guillem Roig
University of Melbourne

  1. Moral Hazard and Target Budgets By Shingo Ishiguro; Yosuke Yasuda
  2. Targeting the Key Player: An Incentive-Based Approach By Mohamed Belhaj; Frédéric Deroïan
  3. A two-dimensional control problem arising from dynamic contracting theory By Décamps, Jean-Paul; Villeneuve, Stéphane
  4. Competing for Talent By Yuhta Ishii; Aniko Ory; Adrien Vigier
  5. Permanent employment and fertility: The importance of job security and the career costs of childbearing By Adrián Nieto

  1. By: Shingo Ishiguro (Graduate School of Economics, Osaka University); Yosuke Yasuda (Graduate School of Economics, Osaka University)
    Abstract: In this paper we investigate a wide class of principal-agent problems with moral hazard and target budgets. The latter requires that the principal fixes a total budget for the wages paid to agents regardless of their outputs realized ex post. Target budgets are relevant not just because they are exogenous institutional constraints in some cases, but they can also endogenously arise in other cases, especially when agents f performances are not verifiable and thus the principal needs subjective evaluations. Although target budgets impose an additional constraint, we show the irrelevance theorem that the principal is never worse off using target budgets when there are at least two risk-neutral agents. Even when all agents are risk averse, we also show that the similar irrelevance result asymptotically holds if the number of agents is sufficiently large. Furthermore, we characterize optimal contracts when the target budget becomes a tight constraint so that the irrelevance result cannot be applied.
    Keywords: Moral Hazard, Multiple Agents, Subjective Evaluation, Target Budgets; Moral Hazard, Multiple Agents, Subjective Evaluation, Target Budgets
    JEL: D82 D86
    Date: 2018–02
  2. By: Mohamed Belhaj (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE); Frédéric Deroïan (InSHS-CNRS and Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE)
    Abstract: We consider a network game with local complementarities. A policymaker, aiming at minimizing or maximizing aggregate effort, contracts with a single agent on the network to trade effort change against transfer. The policymaker has to find the best agent and the optimal contract to offer. Our study shows that for all utilities with linear best-responses, it only takes two statistics about the position of each agent on the network to identify the key player: the Bonacich centrality and a weighted measure of the number of closed walks originating from the agent. We also characterize key players under linear quadratic utilities for various contractual arrangements.
    Keywords: key player, Network, Linear Interaction, incentives, contract, limited budget
    JEL: C72 D85
    Date: 2018–02
  3. By: Décamps, Jean-Paul; Villeneuve, Stéphane
    Abstract: We study a corporate finance dynamic contracting model in which the firm's growth rate fluctuates and is impacted by the unobservable effort exercised by the manager. We show that the principal's problem takes the form of a two-dimensional Markovian control problem. We prove regularity properties of the value function that are instrumental in the construction of the optimal contract that implements full effort, which we derive explicitly. These regularity results appear in some recent economic studies but with heuristic proofs that do not clarify the importance of the regularity of the value function at the boundaries.
    Keywords: Principal-agent problem; two-dimensional control problem; regularity properties
    JEL: G30
    Date: 2018–01
  4. By: Yuhta Ishii (Centro de Investigaci´on Econ´omica, Mexico); Aniko Ory (Cowles Foundation, Yale University); Adrien Vigier (BI Norwegian Business School)
    Abstract: In many labor markets, e.g., for lawyers, consultants, MBA students, and professional sport players, workers get offered and sign long-term contracts even though waiting could reveal significant information about their capabilities. This phenomenon is called unraveling. We examine the link between wage bargaining and unraveling. Two firms, an incumbent and an entrant, compete to hire a worker of unknown talent. Informational frictions prevent the incumbent from always observing the entrant’s arrival, inducing unraveling in all equilibria. We analyze the extent of unraveling, surplus shares, the average talent of employed workers, and the distribution of wages within and across firms.
    Keywords: Unraveling, Talent, Wage Bargaining, Competition, Uncertainty
    JEL: C7 D8 J3
    Date: 2018–02
  5. By: Adrián Nieto
    Abstract: This article studies the impact of permanent employment on the fertility decision. I identify a causal effect by exploiting exogenous variation in subsidies to permanent contracts. Using a 2SLS specification, I firstly examine whether the subsidies had an impact on the use of open-ended contracts, and, in a second step, whether permanent employment has an effect on the decision to have a child. Holding an open-ended contract has a positive impact on the fertility decision by means of a higher job security. However, this effect vanishes when the career costs of childbearing are high. The paper provides two sets of evidence of the previous findings. My micro results based on individual administrative data are consistent with the estimates obtained using aggregate data.
    Keywords: fertility decision, permanent employment, job security, career costs of childbearing, instrumental variables.
    Date: 2018

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