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on Contract Theory and Applications |
| By: | Nadia Fiorino (University of L'Aquila, Italy); Emma Galli (University of Rome "Sapienza", Italy); Ilde Rizzo (University of Catania, Italy); Marco Valente (University of L’Aquila; LEM Sant’Anna, Pisa (Italy); SPRU, University of Sussex (UK) and Ruhr-Universit¨at Bochum (Germany)) |
| Abstract: | Based on the literature on public procurement regulation, we use an Agent-Based Model to assess the performance of different selection procedures. Specifically, we aim at investigating whether and how the inclusion of reputation of firms in the public procurement selection process affects the final cost of the contract. The model defines two types of actors: i) firms potentially competing to win the contract; ii) a contracting authority, aiming at minimizing procurement costs. These actors respond to environmental conditions affecting the actual costs of carrying on the project and which are unknown to firms and to the contracting authority at the time of bidding. The results from the model are generated through simulations by considering different configurations and varying some parameters of the model, such as the firms’ skills, the level of opportunistic rebate, the relative weight of reputation and rebate. The main conclusion is that reputation matters and some policy implications are drawn. |
| Keywords: | Public works, Procurement, Agent-Based modelling JEL Classification code: H57, L14, C63 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:sru:ssewps:2018-17&r=cta |
| By: | Langinier, Corinne (University of Alberta, Department of Economics); Marcoul, Philippe (University of Alberta) |
| Abstract: | Self-funded patent offices should be concerned with patent quality (patents should be granted to only deserving innovations) and quantity (as revenues come from fees paid by applicants). In this context, we investigate what is the impact of the self-funded constraint on different bonus contracts, and how these contracts affect the examiners incentive to prosecute patent applications. We consider contracts in which a patent office offers bonuses on quantity quotas (explicit contract) and on quality outcome (either an implicit contract or an explicit contract based on a quality proxy). We find that a self-funded constrained agency should make different organization choices of incentives. For a low quality proxy precision, an agency facing a tight budget operates well with implicit contracts. However, by only relaxing moderately the budget constraint, the agency might be worse off simply because this will preclude implicit contracts. Only very large patenting fees might allow the agency to compensate for the loss of implicit contracts. |
| Keywords: | Patents; Examiners; Explicit and Implicit Contracts; Self-funded Agency |
| JEL: | D23 D86 O34 |
| Date: | 2018–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:ris:albaec:2018_014&r=cta |
| By: | Bloedel, Alex (Stanford University); Krishna, R. Vijay (Florida State University); Leukhina, Oksana (Federal Reserve Bank of St. Louis) |
| Abstract: | We study optimal insurance contracts for an agent with Markovian private information. Our main results characterize the implications of constrained efficiency for long-run welfare and inequality. Under minimal technical conditions, there is Absolute Immiseration: in the long run, the agent’s consumption and utility converge to their lower bounds. When types are persistent and utility is unbounded below, there is Relative Immiseration: low-type agents are immiserated at a faster rate than high-type agents, and “pathwise welfare inequality” grows without bound. These results extend and substantially generalize the hallmark findings from the classic literature with iid types, suggesting that the underlying forces are robust to a broad class of private information processes. The proofs rely on novel recursive techniques and martingale arguments. When the agent has CARA utility, we also analytically and numerically characterize the short-run properties of the optimal contract. Persistence gives rise to qualitatively novel short-run dynamics and allocative distortions (or “wedges”) and, quantitatively, induces less efficient risk-sharing. We compare properties of the wedges to their counterparts in the dynamic taxation literature. |
| Keywords: | Absolute immiseration; relative immiseration; dynamic contracting; recursive contracts; principal-agent problem; persistent private information. |
| JEL: | C73 D30 D31 D80 D82 E61 |
| Date: | 2018–09–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2018-020&r=cta |
| By: | Julia Anette Schreiner |
| Abstract: | Animal genetic diversity is a unique and irreplaceable heritage. Globally, about 20 % of all breeds or livestock populations are considered to be ‘at risk’ and 9 % are already extinct. On farm, the concentration on elite breeding lines has endangered a number of alternative breeds. In Germany, over half of the entire dairy cattle population belongs to only three dominant breeds. Although several alternative breeds are well known for superior functional characteristics like e.g. a good fertility, an excellent udder health, and their ability to adapt to diverse environments, they are increasingly replaced by Holstein cows due to higher milk performances. To design effective incentive schemes that encourage farmers to maintain desired breeds, it is crucially important to know about their preferences for certain contract components. A discrete choice experiment (DCE) with 160 dairy cattle breeders revealed determinants of farmers’ willingness to accept conservation contracts to conserve rare German cattle breeds like Red dual-purpose cattle or Angler cattle. We included attributes like the monitoring of pairing, requirements for the keeping conditions, a collective bonus for an increase in population by five percent and the contract length in our experimental design. A Random Parameter Logit (RPL) model revealed that farmers favor shorter contracts (one or five years), a bonus for a population increase and the requirement of outdoor access. In contrast, farmers rather reject to choose a contract that requires participation in a breeding program and the prohibition of slatted floors. Two distinctive classes of farmers can be identified based on the results of a Latent Class Model (LCM). Organic farmers are generally less likely to join a program and are even more disapproving contracts where the pairing is monitored by the breeding association. However, it seems that program requirements should not be too restrictive on the farm management and rather focus on the compensation of associated income loss. |
| Keywords: | Agribusiness, Agricultural and Food Policy, Agricultural Finance |
| Date: | 2018–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iefi18:276866&r=cta |
| By: | Babur De los Santos (John E. Walker Department of Economics, Clemson University); Daniel P. O'Brien (Compass Lexecon); Matthijs R. Wildenbeest (Kelley School of Business, Indiana University) |
| Abstract: | This paper examines the relationship between two types of vertical contracts and retail prices under bilateral bargaining. In contrast to traditional wholesale contracts, in agency contracts upstream suppliers set retail prices directly while downstream retailers act as agents who receive a sales royalty. Our model shows that whether agency contracts lead to higher or lower retail prices (vs. wholesale contracts) depends on the distribution of bargaining power between upstream and downstream firms. We propose a methodology to structurally estimate a demand and supply model that allows for both vertical contracting models and uses the Nash-in-Nash bargaining solution to capture competition between upstream and downstream firms. We apply our model to the e-book industry, which has experienced several transitions between agency and wholesale contracts. Our analysis studies the latest transition from wholesale to agency contracts after the expiration of a two-year ban on agency pricing following the settlement of a lawsuit brought by the U.S. Department of Justice against major publishers in the industry. This ban allowed us to observe new agency contracts after a rarely seen restart of bilateral bargaining between publishers and retailers. Using a unique dataset of e-book prices both before and after the change in selling method, we show that prices increased substantially at Amazon following the shift to agency but remained relatively flat at Barnes & Noble. Structural estimates show that our bargaining model gives a better fit to the data than a model with take-it-or-leave-it input contracts. Counterfactual simulations indicate that reinstitution of most favored nation clauses, which were banned in 2012 for a period of five years, would lead to price increases of close to nine percent for non-fiction books. |
| Keywords: | e-books, agency agreements, vertical restraints, bargaining, most favored nation |
| JEL: | C14 D83 L13 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1814&r=cta |
| By: | Giuseppe Attanasi (Université Côte d'Azur, CNRS, GREDEG, France); Laura Concina (FONCSI, Toulouse); Caroline Kamate (FONCSI, Toulouse); Valentina Rotondi (Bocconi University, Milan) |
| Abstract: | We use a controlled laboratory experiment to study firm's and insurer's behavior when the firm can protect itself against potential technological damages. The probability of a catastrophic event is objective, and the firm's costly investment in safety reduces it. The firm can also buy an insurance with full or partial refund against the consequences of the catastrophic event, which ultimately reduces the variance of the firm's investment-in-safety lottery. In the insurer-firm game, first the insurer decides which contract to propose to the firm, then the firm simultaneously decides whether or not to buy this contract and whether or not to invest in the reduction of the probability of the catastrophic events. We parametrize the insurer-firm game such that: (i) a risk-neutral insurer maximizes his expected profit by o↵ering an actuarially fair contract with full insurance; (ii) a risk-neutral firm is indi↵erent between investing in safety and accepting a fair insurance contract. We aim at understanding whether investment in safety and insurance are substitutes or complements in the firm's risk management of catastrophic events. In line with our predictions, the experimental results suggest that they are substitutes rather than complements: the firm's investment in safety measures is a↵ected by the insurer's proposed contract, the latter usually involving only partial insurance. |
| Keywords: | Decision under risk, Losses, Small probabilities, Probability reduction, Technological disasters, Insurance, Deductible |
| JEL: | D81 G22 K32 Q58 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2018-24&r=cta |
| By: | Vuillemey, Guillaume (HEC Paris - Finance Department) |
| Abstract: | I study the real effects a contracting innovation that suddenly made financial markets more complete: central clearing counterparties (CCPs) for derivatives. The first CCP to provide full insulation against counterparty risk was created in Le Havre (France) in 1882, in the coffee futures market. Using triple difference-in-differences estimation, I show that central clearing changed the geography of trade flows Europe-wide, to the benefit of Le Havre. Inspecting the mechanism using trader-level data, I show that the CCP was instrumental both to mitigate adverse selection issues and to solve a ``missing market'' problem. Increased risk-sharing possibilities enabled more gains from trade to be realized. The successful contractual innovation quickly spread to new exchanges. |
| Keywords: | financial markets; central clearing counterparties; risksharing |
| JEL: | D53 N23 |
| Date: | 2018–09–11 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1307&r=cta |