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on Contract Theory and Applications |
| By: | Yashodha, Y. |
| Abstract: | Informal market arrangements are often in place when formal institutions are too weak to establish a formal mechanism for resource allocation. In this paper, we study informal groundwater contracts in India, in particular, the bargaining power of sellers and buyers. We conduct an economic experiment with actual buyers and sellers of groundwater contracts, where agents make a series of choices between output-shared and fixed-price contracts, first individually and then jointly. Output-shared contracts are chosen more often when the decision is joint. Further, the likelihood of choosing an output-shared contract depends on the relative risk preferences of sellers and buyers. Sellers have a strong influence in deciding the joint contract. However, buyers’ bargaining power increases when they share interpersonal relationships with sellers, such as kinship ties, or have a long contractual history together. |
| Keywords: | Agricultural and Food Policy, Labor and Human Capital |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:276035&r=cta |
| By: | Dan Cao (Department of Economics, Georgetown University); Roger Lagunoff (Department of Economics, Georgetown University) |
| Abstract: | We examine the role of collateral in a dynamic model of optimal credit contracts in which a borrower values both housing and non-housing consumption. The borrower’s private information about his income is the only friction. An optimal contract is collateralized when in some state, some portion of the borrower’s net worth is forfeited to the lender. We show that optimal contracts are always collateralized. The total value of forfeited assets is decreasing in income, highlighting the role collateral as a deterrent to manipulation. Some assets, those that generate consumable services will necessarily be collateralized while others may not be. Endogenous default arises when the borrower’s initial wealth is low, as with subprime borrowers, and/or his future earnings are highly variable. |
| Keywords: | optimal contract, asymmetric information, collateral, forfeiture, collateralized contract |
| JEL: | D82 D86 D53 D14 G21 G22 |
| Date: | 2018–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~18-18-14&r=cta |
| By: | Hengjie Ai; Anmol Bhandari |
| Abstract: | This paper studies asset pricing in a setting in which idiosyncratic risk in human capital is not fully insurable. Firms use long-term contracts to provide insurance to workers, but neither side can commit to these contracts; furthermore, worker-firm relationships have endogenous durations owing to costly and unobservable effort. Uninsured tail risk in labor earnings arises as a part of an optimal risk-sharing scheme. In the general equilibrium, exposure to the resulting tail risk generates higher risk premia, more volatile returns, and variations in expected returns across firms. Model outcomes are consistent with the cyclicality of factor shares in the aggregate, and the heterogeneity in exposures to idiosyncratic and aggregate shocks in the cross section. |
| JEL: | E24 G12 J3 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24972&r=cta |
| By: | Hoffmann, Florian; Inderst, Roman; Opp, Marcus M. |
| Abstract: | This paper provides a complete characterization of optimal contracts in principal-agent settings where the agent's action has persistent effects. We model general information environments via the stochastic process of the likelihood-ratio. The martingale property of this performance metric captures the information benefit of deferral. Costs of deferral may result from both the agent's relative impatience as well as her consumption smoothing needs. If the relatively impatient agent is risk neutral, optimal contracts take a simple form in that they only reward maximal performance for at most two payout dates. If the agent is additionally risk-averse, optimal contracts stipulate rewards for a larger selection of dates and performance states: The performance hurdle to obtain the same level of compensation is increasing over time whereas the pay-performance sensitivity is declining. |
| Keywords: | compensation design,duration of pay,moral hazard,persistence,principal-agent models,informativeness principle |
| JEL: | D86 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:218&r=cta |