nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2018‒04‒09
three papers chosen by
Guillem Roig
University of Melbourne

  1. Combinations of Different Length Contracts in a Multiperiod Model: Short, Medium and Long-term Contracts By Meg Adachi-Sato; Kazuya Kamiya
  2. The International Organization of Production in the Regulatory Void By Philipp Herkenhoff; Sebastian Krautheim
  3. Clearinghouse-Five: determinants of voluntary clearing in European derivatives markets By Fiedor, Paweł

  1. By: Meg Adachi-Sato (School of Economics, Finance and Marketing, Royal Melbourne Institute of Technology University); Kazuya Kamiya (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: This paper develops a dynamic contracting model with verifi able and unverifi able outputs. We prove the following properties of equilibrium wage contracts, which are new to the literature: (i) combinations of dfferent length contracts can become equilibria, (ii) medium-term contracts can be included in the combinations, and (iii) equilibrium wage pro le dffers by the way different length contracts are combined. We also investigate a general mechanism, which includes menu and option contracts, and show that no mechanism can perform better than simple wage contracts in our environment. In short, above properties remain valid under general mechanisms.
    Keywords: Dffering length contracts, Unverifi able outputs, Unveri fiable investments, Unveri fiable ability, Holdup problems
    JEL: D86 J41 J31
    Date: 2018–03
  2. By: Philipp Herkenhoff; Sebastian Krautheim
    Abstract: Over the last decades, the internationalization of the value chain has allowed firms to exploit cross-country differences in environmental and labor regulation (and enforcement) in ways that have led to a large number of NGO campaigns and consumer boycotts criticizing ‘unethical’ practices. How do potential ‘unethical’ cost savings on the one hand and the threat to reputation and sales on the other interact with the international organization of production? In this paper we introduce North-South differences in regulation, a cost-saving ‘unethical’ technology and consumer boycotts into a standard property rights model of international production. Contracts are incomplete, so that a firm has limited control over both investments and (un)ethical technology choices of both foreign affiliates and suppliers along the value chain. We show that international outsourcing and ‘unethical’ production are linked through a novel unethical outsourcing incentive, for which we also provide empirical support: a high cost advantage of ‘unethical’ production in an industry and a low regulatory stringency in the supplier's country favor international outsourcing (as opposed to vertical FDI). We also provide a microfounded model of investment and pricing under incomplete contracts when the production technology is a credence characteristic of the final good and an NGO investigates firms and may initiate a consumer boycott.
    Keywords: multinational firms, international outsourcing, property rights theory of the firm, ethical production, labor standards, pollution, consumer boycotts, credence goods, NGOs
    JEL: D21 D23 F12 F23 J81 L22 L23 L31 L50 Q53
    Date: 2018
  3. By: Fiedor, Paweł
    Abstract: In the European Union, there is obligation to centrally clear certain credit and interest rate derivative contracts, while other trades can be voluntarily cleared through a central counterparty if the parties to the contract wish to clear it thus. I use a dataset of all newly entered into derivatives contracts in the European Union between March 2016 and June 2017 to show the extent to which central clearing is being used for derivatives belonging to all five major asset classes, and to determine which characteristics of the contracts not under the clearing obligation affect the likelihood they would be centrally cleared on a voluntary basis. I show that currently only around 20% of credit and 40% of interest rate derivatives are centrally cleared, while equity, foreign exchange, and commodity derivatives are barely centrally cleared. I also show that there are significant effects of scale connected with central clearing, both in terms of previous clearing activity of the counterparty and the notional of the specific contract. Finally, I show that various characteristics of the contract, such as the maturity and the type of counterparty involved, also have significant impact on the probability of a trade being centrally cleared, but these effects tend to be ambiguous and depend on the specific combination of factors. JEL Classification: C58, G28, G32
    Keywords: central counterparties, clearing, derivatives, EMIR data
    Date: 2018–03

This nep-cta issue is ©2018 by Guillem Roig. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.