nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2018‒04‒30
five papers chosen by
Guillem Roig
University of Melbourne

  1. Relational Incentive Contracts and Performance Measurement. By Chi, Chang Koo; Olsen, Trond E.
  2. Time Is on My Side: Relational Contracts and Aggregate Welfare By Kukharskyy, Bohdan; Pflüger, Michael P.
  3. Blockchain: The birth of decentralized governance By Benito Arruñada; Luis Garicano
  4. On Lawyer Compensation When Appeals Are Possible. By Christian At; Tim Friehe; Yannick Gabuthy
  5. A Tale of Two Academic Tracks By Asali, Muhammad

  1. By: Chi, Chang Koo (Dept. of Economics, Norwegian School of Economics and Business Administration); Olsen, Trond E. (Department of Business and Management Science)
    Abstract: This paper analyzes relational contracts under moral hazard. We first show that if the available information (signal) about effort satisfies a generalized monotone likelihood ratio property, then irrespective of whether the first-order approach (FOA) is valid or not, the optimal bonus scheme takes a simple form. The scheme rewards the agent a fixed bonus if his performance index exceeds a threshold, like the FOA contract of Levin (2003), but the threshold can be set differently. We next derive a sufficient and necessary condition for non-verifiable information to improve a relational contract. Our new informativeness criterion sheds light on the nature of an ideal performance measure in relational contracting.
    Keywords: Relational contracts; non-verifiable performance measures; first-order approach; bonus scheme; informativeness criterions
    JEL: D80 D86 L14
    Date: 2018–04–20
  2. By: Kukharskyy, Bohdan (University of Passau); Pflüger, Michael P. (University of Würzburg)
    Abstract: This paper develops a simple general equilibrium model which establishes a link between the patience of economic agents and the well-being of nations. We show that firms in long-term oriented countries can mitigate hold-up inefficiencies by engaging with their suppliers in relational contracting – informal agreements sustained by the value of future relationships. Our model predicts that countries with a higher level of patience will exhibit greater economic well-being and higher total factor productivity. We provide empirical evidence in line with the predictions of our theory.
    Keywords: time preferences, relational contracting, aggregate welfare, TFP
    JEL: D23 L14 L22 L23 O10
    Date: 2018–03
  3. By: Benito Arruñada; Luis Garicano
    Abstract: By allowing networks to split, decentralized blockchain platforms protect members against hold up, but hinder coordination, given that adaptation decisions are ultimately decentralized. The current solutions to improve coordination, based on “premining” cryptocoins, taxing members and incentivizing developers, are insufficient. For blockchain to fulfill its promise and outcompete centralized firms, it needs to develop new forms of “soft” decentralized governance (anarchic, aristocratic, democratic, and autocratic) that allow networks to avoid bad equilibria.
    Keywords: blockchain, platforms, networks, hold‐up, coordination, relational capital, incomplete contracts, decentralized governance
    JEL: D23 L12 L22 L86
    Date: 2018–04
  4. By: Christian At; Tim Friehe; Yannick Gabuthy
    Abstract: This paper describes how plaintiff should compensate lawyers, who choose unobservable effort, when litigation may proceed from the trial to the appeals court. We find that, when it is very likely that the defendant will appeal, transfers made to the lawyer only after an appeals court’s ruling are key instruments in incentivizing both trial and appeal court effort. Indeed, the lawyer may not receive any transfer after the trial court’s ruling. In contrast, when reaching the appeals stage is unlikely, a favorable trial court ruling triggers a positive transfer to the lawyer and first-best appeals effort. In our setup, the lawyer may receive a lower transfer after winning in both the trial and the appeals court as compared to the scenario in which the first-instance court ruled against the plaintiff and the appeals court reversed that ruling.
    Keywords: Litigation, Appeals, Moral hazard, Optimal contract.
    JEL: D82 K41
    Date: 2018
  5. By: Asali, Muhammad (ISET, Tbilisi State University)
    Abstract: Given asymmetric information, this paper explores the need for non-tenure-track jobs in academia alongside the usual tenure-track positions. It also explains the coexistence of these two types of jobs in research universities as an equilibrium phenomenon. The increased effort needed to produce research, accompanied by imprecisions in the academic editorial process, explains the recent increasing trend in the share of non-tenure-track jobs in academia as well as the widening wage gap between tenure-track and non-tenure-track academics.
    Keywords: efficiency wages, tenure-track, coexistence of two contracts in equilibrium
    JEL: J21 J11 J24 J31 J41 J44 I23
    Date: 2018–03

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