|
on Contract Theory and Applications |
| By: | Ozdenoren, Emre; Yuan, Kathy; Zhang, Shengxing |
| Abstract: | Abstract We study a dynamic problem of the design and sale of a security backed by a long-lived asset. The dividend payment on the asset may be high or low. Issuers are privately informed about the quality of the asset, and raise capital by securitizing part of it to fund a productive technology. Issuers can pledge not only the current period payoff from the assets, but also the future resale price. There is a dynamic feedback loop between the future asset price and today's issuers' decision where both adverse selection and the productivity level determine the liquidity of the security. Multiple dynamic - liquid and illiquid - equilibria might arise when only equity contracts can be issued. We characterize the optimal security design and demonstrate short-term liquid collateralized debt, or short-term repo, is optimal and eliminates the multiple equilibria fragility. In fact, the unique equilibrium under debt contract improves social welfare relative to the illiquid equity equilibrium. |
| Keywords: | financial fragility; liquidity; repo; security design |
| JEL: | G01 G10 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13069&r=cta |
| By: | Shiming Fu (University of Rochester); Giulio Trigilia (University of Rochester) |
| Abstract: | We introduce voluntary disclosure in a dynamic agency model with non-verifiable cash flows. Evidence reduces the use of high powered cash incentives, and the optimal contract features ``pay for verifiable bad luck''. The firm solvency and liquidity dynamics can be implemented by long-term debt, equity, and a credit line with interest rate contingent on both the disclosed evidence and the reported cash flow. Against the conventional wisdom, more frequent expected disclosure might lower firm value ex ante. As more evidence becomes available, two countervailing forces shape the solvency and liquidity dynamics: while firm value becomes more persistent after disclosure of bad news, the firm faces higher interest rate charges both in low states (absent disclosure), and when cash flows are high. For low profitability firms, the two effects must induce a non-monotonicity in firm value: more widespread evidence leads to less firms surviving in the long run. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:448&r=cta |
| By: | de Cornière, Alexandre; Taylor, Greg |
| Abstract: | Motivated by the recent Google-Android antitrust case, we present a novel rationale for bundling by a multiproduct upstream firm. Consider a market where downstream firms procure components from upstream suppliers. U1 is the only supplier of component A, but faces competition for component B. Suppose that component A increases demand for the downstream product and that contractual frictions induce positive wholesale markups. By bundling A and B, U1 reduces its B-rivals' willingness to offer slotting fees to the downstream firm, thereby allowing U1 to capture more of the industry profit. Bundling harms the downstream firm and the B rivals, and can be anticompetitive. |
| Keywords: | Bundling; Exclusion; Vertical Relations |
| JEL: | L1 L4 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13083&r=cta |
| By: | Paulo Fagandini |
| Abstract: | I study the moral hazard problem where an agent can create an extra instance of effort and potentially improve bad realizations of the outcome before the principal observes it. The agent cannot hide the outcome of his effort, but just the way he achieved it. Findings are that both, principal and agent, value the option of improving the outcome in case of a bad realization if doing so is cheap. I also find that contracted effort is not always decreasing in its cost. I also study the situation in which, if the principal can impose short deadlines and eliminate the agent's extra chance, under a broad range of scenarios, the principal will do so when the parameters make agency costs sufficiently high. Finally, if the creation of the extra instance can cause a punishment for the principal, and if that punishment is sufficiently big, the principal will avoid writing contracts that incentive effort only on the extra chance. JEL codes: D82, D86 |
| Keywords: | moral hazard, asymmetric information, contract theory, second chance |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:unl:unlfep:wp629&r=cta |
| By: | Oleg Malafeyev; Shulga Andrey |
| Abstract: | Over the past few years, the futures market has been successfully developing in the North-West region. Futures markets are one of the most effective and liquid-visible trading mechanisms. A large number of buyers are forced to compete with each other and raise their prices. A large number of sellers make them reduce prices. Thus, the gap between the prices of offers of buyers and sellers is reduced due to high competition, and this is a good criterion for the liquidity of the market. This high degree of liquidity contributed to the fact that futures trading took such an important role in commerce and finance. A multi-step, non-cooperative n persons game is formalized and studied |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1808.05037&r=cta |
| By: | Krueger, Alan B. (Princeton University); Ashenfelter, Orley (Princeton University) |
| 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. |
| Keywords: | collusion, no-poaching agreement, monopsony, oligopsony, franchise |
| JEL: | J42 J41 J63 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11672&r=cta |
| By: | Soheil Ghili (Cowles Foundation, Yale University); Matthew Schmitt (UCLA) |
| Abstract: | In vertical markets, eliminating double marginalization with a two-part tariff may not be possible due to downstream firms' risk aversion. When demand is uncertain, contracts with large fixed fees expose the downstream rm to more risk than contracts that are more reliant on variable fees. In equilibrium, contracts may thus rely on variable fees, giving rise to double marginalization. Counterintuitively, we show that increased demand risk or risk aversion can actually mitigate double marginalization. We also characterize several sufficient conditions under which increased risk or risk aversion does exacerbate double marginalization. We conclude with an application to merger analysis. |
| Keywords: | Risk Aversion, Double Marginalization, Vertical Markets |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2144&r=cta |
| By: | Jeremy Greenwood (University of Pennsylvania); Juan Sanchez (Federal Reserve Bank of St. Louis); Pengfei Han (University of Pennsylvania) |
| 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 fi nancing, venture capitalists evaluate the viability of startups. If viable, VCs 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 rate, failure rate, investment rate, equity shares, and the value of an IPO. Raising capital gains taxation reduces growth and welfare. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1204&r=cta |
| By: | Ariong, R.; Ilukor, J.; Bonabana-Wabbi, J.; Birachi, E.; Ugen, M. |
| Abstract: | Governance of economic exchange can be realized through various coordination mechanisms and thus, farmers must choose alternative mechanism through which to channel their primary commodity. This paper looks at two coordination mechanisms and returns accruable from farmer participation in either spot market arrangement or bilateral contract arrangement, or both. Participation in two coordination mechanisms is observed as safe-guard of expected benefits against market uncertainty. Based on survey data from 349 smallholder farmers in central Uganda, we find that farmers derive higher benefit from participation in bilateral market coordination compared to spot market coordination. It is shown that there the difference in yield among the farmer categories is insignificant and that farmers who participate in both spot market and bilateral contracts earn twice compared to farmers under only spot markets. For returns to labor, every dollar cost of labor yields US$ 1.1 under single market coordination and about US$ 1.5 under double market coordination system. The trade-off analysis showed that adoption rate for bilateral contract system is about 56.5% and there are gains in adoption of bilateral contract market coordination. Thus, promotion of bilateral contracts requires provisions that allow farmers to participate in more than one markets while limiting contract reneging. |
| Keywords: | Agricultural and Food Policy, International Relations/Trade |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:276010&r=cta |