nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2018‒07‒16
seven papers chosen by
Guillem Roig
University of Melbourne

  1. Two-Echelon Lot-Sizing with Asymmetric Information and Continuous Type Space By Kerkkamp, R.B.O.; van den Heuvel, W.; Wagelmans, A.P.M.
  2. CEO Compensation: Agency Theory is Irrelevant but not the Neoclassical Game-Theoretic Framework By Anne Amar-Sabbah; Pierre Batteau
  3. Dynamic optimal contract under parameter uncertainty with risk averse agent and principal By Kerem Ugurlu
  4. Discretion and supplier selection in public procurement By Audinga Baltrunaite; Cristina Giorgiantonio; Sauro Mocetti; Tommaso Orlando
  5. Bribery, Hold-Up and Bureaucratic Structure By John Bennett; Matthew D. Rablen
  6. Optimal Contracts for Discouraging Deforestation with Risk Averse Agents By Charles F. Mason
  7. The Scope of Sequential Screening with Ex-Post Participation Constraints By Bergemann, Dirk; Castro, Francisco; Weintraub, Gabriel

  1. By: Kerkkamp, R.B.O.; van den Heuvel, W.; Wagelmans, A.P.M.
    Abstract: We analyse a two-echelon discrete lot-sizing problem with a supplier and a retailer under information asymmetry. We assume that all cost parameters are time independent and that the retailer has single-dimensional continuous private information, namely either his setup cost or his holding cost. The supplier uses mechanism design to determine a menu of contracts that minimises his expected costs, where each contract specifies the retailer's procurement plan and a side payment to the retailer. There is no restriction on the number of contracts in the menu. To optimally solve this contracting problem we present a two-stage approach, based on a theoretical analysis. The first stage generates a list of procurement plans that is sufficient to solve the contracting problem to optimality. The second stage optimally assigns these plans to the retailer types and determines all side payments. The result is an optimal menu with finitely many contracts that pools retailer types. We identify cases for which the contracting problem can be solved in polynomial time and provide the corresponding algorithms. Furthermore, our analysis reveals that information asymmetry leads to atypical structures in the plans of the optimal menu, e.g., plans violating the zero-inventory property. Our solution approach and several results are directly applicable to more general problems as well.
    Date: 2018–05–14
  2. By: Anne Amar-Sabbah (CERGAM - Centre d'Études et de Recherche en Gestion d'Aix-Marseille - AMU - Aix Marseille Université - UTLN - Université de Toulon); Pierre Batteau (CERGAM - Centre d'Études et de Recherche en Gestion d'Aix-Marseille - AMU - Aix Marseille Université - UTLN - Université de Toulon)
    Abstract: Often criticized in the civil society for its magnitude, though considered with mixed appreciations by academics, CEO pay has been objects of many contributions. Reviewing key papers that have raised controversies, we discuss divergent viewpoints with simple game theoretic models in the neoclassical spirit. We assert the complete inadequacy of the agency and asymmetry of information models for explaining CEO compensation, but we diverge from those who reject the optimal contracting approach and show how reasoning with the classical tools of utility maximization, rationality, freedom to participate, and price sets on markets, competitive or not, can model a broad range of situations, including those put forward as arguments against the microeconomic approaches of compensation. The CEO-Board relationship should not be studied as a delegation issue within a hierarchical organization with the shareholders sitting at the top, but rather as a market bargain in search of optimal contracting with symmetrical position and information of both parties, but with asymmetrical reservation utility because the distribution of talent to manage is itself highly asymmetrical, expressing the game power of each side.
    Keywords: rationality,CEO compensation,agency theory,bargaining,optimal contracting,utility maximization,CEO power,game theory,Neo-classical economics
    Date: 2018–06–19
  3. By: Kerem Ugurlu
    Abstract: We consider a continuous time Principal-Agent model on a finite time horizon, where we look for the existence of an optimal contract both parties agreed on. Contrary to the main stream, where the principal is modelled as risk-neutral, we assume that both the principal and the agent have exponential utility, and are risk averse with same risk awareness level. Moreover, the agent's quality is unknown and modelled as a filtering term in the problem, which is revealed as time passes by. The principal can not observe the agent's real action, but can only recommend action levels to the agent. Hence, we have a \textit{moral hazard} problem. In this setting, we give an explicit solution to the optimal contract problem.
    Date: 2018–06
  4. By: Audinga Baltrunaite (Banca d'Italia); Cristina Giorgiantonio (Banca d'Italia); Sauro Mocetti (Banca d'Italia); Tommaso Orlando (Banca d'Italia)
    Abstract: Public procurement outcomes depend on the ability of the procuring agency to select high-performing suppliers. Should public administrations be granted more or less discretion in their decision making? Using Italian data on municipal public works tendered in the period 2009-2013, we study how a reform extending the scope of bureaucrat discretion affects supplier selection. We find that the share of contracts awarded to firms having a local politician among its administrators or shareholders increases, while the (ex-ante) labor productivity of the winning firms decreases, thus suggesting a potential misallocation of public funds. These effects are concentrated among lower quality procurement agencies.
    Keywords: discretion, supplier selection, public procurement, transparency, corruption
    JEL: D72 D73 H57 P16
    Date: 2018–06
  5. By: John Bennett (Royal Holloway University of London); Matthew D. Rablen (University of Sheffield)
    Abstract: We analyze the provision of infrastructure by a foreign investor when the domestic bureaucracy is corrupt, but puts some weight on domestic welfare. The investor may pay a bribe in return for a higher provisional contract price. After the investment has been sunk, the bureaucracy may hold up the investor, using the threat of expropriation to demand a lower Önal price or another bribe. Depending on the level of care for domestic welfare, greater bureaucratic centralization may increase or decrease domestic welfare. Because of the threat of hold-up, bribery may result in greater domestic welfare than the honest benchmark does.
    Keywords: bribery, hold-up, renegotiation, bureaucratic structure, centralized bureaucracy, decentralized bureaucracy.
    JEL: D73 H11
    Date: 2018–11
  6. By: Charles F. Mason
    Abstract: There is an emerging consensus that carbon emissions must be limited. An attractive approach to promoting carbon reductions is to encourage reductions in deforestation. But any such strategy must confront a basic problem: agents that might be induced to reduce their actions which would reduce forests have private information about their opportunity costs. This concern seems particularly likely to apply in situations where there are significant related risks, as agents seem highly likely to differ in their tolerance for risk. In this paper, I investigate a contracting scheme designed to mitigate the asymmetric information problem where agents are heterogeneous in their tolerance for risk. Mechanisms that recognize the potential insurance value associated with the acquisition of sequestration services, and that pay attention to landholders’ private information about risk tolerance, offer a sensible way to approach the problem. These contracts are generally a cheaper approach to maintenance of forests than a simple, constant per-unit subsidy.
    Keywords: incentive contracting, risk aversion, deforestation
    JEL: D04 D86 L15 Q54
    Date: 2018
  7. By: Bergemann, Dirk; Castro, Francisco; Weintraub, Gabriel
    Abstract: We study the classic sequential screening problem in the presence of buyers' ex-post participation constraints. A leading example is the online display advertising market, in which publishers frequently do not use up-front fees and instead use transaction-contingent fees. We establish conditions under which the optimal selling mechanism is static and buyers are not screened with respect to their interim type, or sequential and the buyers are screened with respect to their interim type. In particular, we provide an intuitive necessary and sufficient condition under which the static contract is optimal for general distributions of ex-post values. Further, we completely characterize the optimal sequential contract with binary interim types and continuum of ex-post values when this condition fails. Importantly, the latter contract randomizes the allocation of the low type buyer while giving a deterministic allocation to the high type. We also provide partial results for the case of multiple interim types.
    Keywords: ex-post participation constraints; sequential contract.; Sequential Screening; static contract
    JEL: C72 D82 D83
    Date: 2018–06

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