nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2018‒08‒13
six papers chosen by
Guillem Roig
University of Melbourne

  1. A microeconomic model of worker motivation based on monetary and non-monetary incentives By Petrick, Martin
  2. Relational Contracts with Private Information On the Future Value of the Relationship By Fahn, Matthias; Klein, Nicolas
  3. Theory and Evidence on Employer Collusion in the Franchise Sector By Alan B. Krueger; Orley Ashenfelter
  4. Courts' Decisions, Cooperative Investments, and Incomplete Contracts By Alessandro De Chiara
  5. Financing Ventures By Jeremy Greenwood; Pengfei Han; Juan M. Sanchez
  6. Uncertain Altruism and Non-Linear Long-Term Care Policies By Chiara Canta; Helmuth Cremer

  1. By: Petrick, Martin
    Abstract: By focusing on direct monetary incentives, the traditional literature on motivating workers predicts that high-effort outcomes are unlikely unless workers become residual claimants of profit. However, real world employment contracts typically display a low incidence of profit sharing. In this paper, I extend the canonical model of a revenue sharing contract by integrating two more options for incentivising workers. The literature to date has discussed these strategies in isolation from each other. First, I assume that workers derive utility from following a work norm. The manager can influence workers' identification with a high-effort work norm at a cost. Second, workers risk being fired if they are observed shirking. Depending on the rigidity of their employment contract, this threat of termination induces them to increase effort. Key drivers of the optimal employment contract are then the variance of output, the costs of inducing worker's identification with high-effort norms and the rigidity of the labour market.
    Date: 2018
  2. By: Fahn, Matthias (JKU Linz); Klein, Nicolas (University of Montreal)
    Abstract: We analyze a relational contracting problem, in which the principal has private information about the future value of the relationship. In order to reduce bonus payments, the principal is tempted to claim that the value of the future relationship is lower than it actually is. To induce truth-telling, the optimal relational contract may introduce distortions after a bad report. For some levels of the discount factor, output is reduced by more than would be sequentially optimal. This distortion is attenuated over time even if prospects remain bad. Our model thus provides an alternative explanation for indirect short-run costs of downsizing.
    Keywords: relational contracts; sequential inefficiencies; downsizing;
    JEL: C73 D86
    Date: 2018–07–23
  3. By: Alan B. Krueger; Orley Ashenfelter
    Abstract: In this paper we study the role of covenants in franchise contracts that restrict the recruitment and hiring of employees from other units within the same franchise chain in suppressing competition for workers. Based on an analysis of 2016 Franchise Disclosure Documents, we find that "no-poaching of workers agreements" are included in a surprising 58 percent of major franchisors' contracts, including McDonald's, Burger King, Jiffy Lube and H&R Block. The implications of these no-poaching agreements for models of oligopsony are also discussed. No-poaching agreements are more common for franchises in low-wage and high-turnover industries.
    JEL: J08 J23 J41 J42 J47 J53 J62 J63
    Date: 2018–07
  4. By: Alessandro De Chiara
    Abstract: Buyers may try to motivate their sellers to make relationship-specific investments to reduce the probability that the design of the goods they procure is defective. In some countries, courts examine how much real authority the seller had in performing the work to assign liability for a design failure. I show that this courts’ approach induces the sellers to under-invest and the buyers to under-specify the design of the goods. I find that this approach can also make it harder to sustain optimal relational contracting, leading to the conclusion that it cannot be justified on efficiency grounds.
    Keywords: Cooperative Investments, Courts, Defective Specifications, Design Failure, Expectation Damages, Formal and Real Authority, Incomplete Contracts, Relational Contracts. JEL classifications: D23, D86, K12, L23, L24.
    Date: 2018–07–10
  5. By: Jeremy Greenwood; Pengfei Han; Juan M. Sanchez
    Abstract: The relationship between venture capital and growth is examined using an endogenous growth model incorporating dynamic contracts between entrepreneurs and venture capitalists. At each stage of financing, venture capitalists evaluate the viability of startups. If viable, venture capitalists provide funding for the next stage. The success of a project depends on the amount of funding. The model is confronted with stylized facts about venture capital; viz., statistics by funding round concerning the success rates, failure rates, investment rates, equity shares, and IPO values. Raising capital gains taxation reduces growth and welfare.
    JEL: E13 E22 G24 L26 O16 O31 O40
    Date: 2018–07
  6. By: Chiara Canta; Helmuth Cremer
    Abstract: We study the design of public long-term care (LTC) insurance when the altruism of informal caregivers is uncertain. We consider non-linear policies where the LTC benefit depends on the level of informal care, which is assumed to be observable while children’s altruism is not. The traditional topping up and opting out policies are special cases of ours. Both total and informal care should increase with the children’s level of altruism. This obtains under full and asymmetric information. Social LTC, on the other hand, may be non-monotonic. Under asymmetric information, social LTC is lower than its full information level for the lowest level of altruism, while it is distorted upward for the higher level of altruism. This is explained by the need to provide incentives to high-altruism children. The implementing contract is always such that social care increases with formal care.
    Keywords: long term care, uncertain altruism, private insurance, public insurance, topping up, opting out
    JEL: H20 H50
    Date: 2018

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