nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2018‒05‒07
seven papers chosen by
Guillem Roig
University of Melbourne

  1. On the Optimal Use of Correlated Information in Contractual Design under Limited Liability By Daniel Danau; Annalisa Vinella
  2. Blockchain: The birth of Decentralized Governance By Benito Arruñada; Luis Garicano
  3. Relational Incentive Contracts and Performance Measurement By Chi, Chang Koo; Olsen, Trond E.
  4. Deterministic versus Stochastic Contracts in a Dynamic Principal-Agent Model By Mettral, Thomas
  5. Of Restarts and Shutdowns: Dynamic Contracts with Unequal Discounting By Krasikov, Ilia; Lamba, Rohit; Mettral, Thomas
  6. Competition in health care markets: treatment volume and quality By Boone, Jan
  7. Measuring Market Power in Gasoline Retailing: A Market- or Station Phenomenon? By Nguyen-Ones, Mai; Steen, Frode

  1. By: Daniel Danau; Annalisa Vinella
    Abstract: Riordan and Sappington (JET, 1988) show that in an agency relationship in which the agent’s type is correlated with a public ex post signal, the principal may attain first best (full surplus extraction and efficient output levels) if the agent is faced with a lottery such that each type is rewarded for one signal realization and punished equally for all the others. Gary-Bobo and Spiegel (RAND, 2006) show that this kind of lottery is most likely to be locally incentive compatible when the agent is protected by limited liability. In this paper, we investigate how the principal should construct the lottery to attain not only local but also global incentive compatibility. We first assess that the main issue with global incentive compatibility rests with intermediate types being potentially attractive reports to both lower and higher types. We then show that a lottery including three levels of profit (rather than only two) is optimal in that it is most likely to be globally incentive compatible under limited liability, if local incentive constraints are strictly satisfied. We identify conditions under which first best is implemented. In a setting with three types and three signals we also pin down the optimal distortions when those conditions are violated. We show that, if local incentive compatibility is not an issue but first best is beyond reach, then it is generally optimal to concede an information rent to one type only.
    Keywords: informative signals, limited liability, conditional probability, incentive compatibility, full-rank condition
    JEL: D82
    Date: 2018
  2. 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
  3. By: Chi, Chang Koo (Dept. of Economics, Norwegian School of Economics); Olsen, Trond E. (Dept. of Business and Management Science, Norwegian School of Economics)
    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: D00 D20 D21 D80 D86
    Date: 2018–04–30
  4. By: Mettral, Thomas (HU Berlin)
    Abstract: I show that deterministic dynamic contracts between a principal and an agent are always at least as profitable to the principal as stochastic ones, if the so-called first-order approach in dynamic mechanism design is satisfied. The principal commits, while the agent\'s type evolution follows a Markov process. My results demonstrate, even when allowing for potential correlation of stochastic contracts across periods that the usual restriction in the literature to deterministic contracts is admissible, as long as the first-order approach is valid.
    Keywords: contract theory; principal-agent theory; dynamic contracting;
    JEL: D82 D86
    Date: 2018–04–24
  5. By: Krasikov, Ilia (Penn State University;); Lamba, Rohit (Penn State University); Mettral, Thomas (HU Berlin)
    Abstract: A large supplier (principal) contracts with a small firm (agent) to repeatedly provide working capital in return for payments. The total factor productivity of the agent is private and follows a Markov process. Moreover, the agent is less patient than the principal. We solve for the optimal contract in this environment. Distortions are pervasive and efficiency unattainable. The optimal contract is characterized by two key properties: restart and shutdown, which capture various aspects of contracts offered in the marketplace. The optimal distortions are completely pinned down by the number of low TFP shocks since the last high shock. Once a high shock arrives, the contract loses memory and repeats the same cycle, we call this endogenous resetting feature restart. If ex ante agency frictions are high, the principal commits to not serving the low type, we call this shutdown. The principal prefers a patient agent if the interim agency friction, as measured by the persistence of the private information is large, and she prefers an impatient agent if it is small. Finally, when global incentive constraints bind, we (i) provide the complete recursive solution, and (ii) characterize a simpler incentive compatible contract that is approximately optimal.
    Keywords: ;
    Date: 2018–04–24
  6. By: Boone, Jan
    Abstract: This paper introduces a workhorse model to analyze the effects of provider and insurer competition in health care markets. The two contracting imperfections we focus on are the following: (i) whether or not a patient should be treated and (ii) treatment quality are both not contractible. We derive conditions under which the market can implement first best quality and volume with the optimal competition intensities. First best competition intensity is strictly positive in both markets. If there is under-investment in quality, provider competition should be increased. Increasing insurer competition tends to increase treatment volume. If the planner cannot make the provider market competitive enough, it is optimal to increase insurer competition beyond its first best level thereby creating over-treatment.
    Keywords: competition in health care markets; insurer competition; provider competition; treatment quality; treatment volume
    JEL: I11 I13
    Date: 2018–04
  7. By: Nguyen-Ones, Mai; Steen, Frode
    Abstract: Applying detailed consecutive daily micro data at the gasoline station level from Sweden we estimate a structural model to uncover the degree of competition in the gasoline retail market. We find that retailers do exercise market power, but despite the high upstream concentration, the market power is very limited on the downstream level. The degree of market power varies with both the distance to the nearest station and the local density of gasoline stations. A higher level of service tends to raise a seller's market power; self-service stations have close to no market power. Contractual form and brand identity also seem to matter. We find a clear result: local station characteristics significantly affect the degree of market power. Our results indicate that local differences in station characteristics can more than offset the average market power found for the whole market.
    Keywords: Gasoline markets; local market competition; market power; markup estimation
    JEL: D22 L13 L25 L81
    Date: 2018–04

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