nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2018‒10‒29
four papers chosen by
Guillem Roig
University of Melbourne

  1. Sustainable Debt By Bloise, Gaetano; Polemarchakis, Herakles; Vailakis, Yiannis
  2. Asymmetric information and heterogeneous effects of R&D subsidies: evidence on R&D investment and employment of R&D personel By Ugur, Mehmet; Trushin, Eshref
  3. Measuring Physicians’ Response to Incentives: Evidence on Hours Worked and Multitasking By Bruce Shearer; Nibene Habib Somé; Bernard Fortin
  4. Communicating Subjective Evaluations By Lang, Matthias

  1. By: Bloise, Gaetano (Yeshiva University); Polemarchakis, Herakles (University of Warwick); Vailakis, Yiannis (University of Glasgow)
    Abstract: Debt is sustainable at a competitive equilibrium due solely to the reputation of debtors for repayment; that is, even absent collateral or legal sanctions available to creditors. Under incomplete markets, when the rate of interest (net of growth) is recurrently negative, self-insurance is more costly than borrowing, and repayments on loans are enforced by he implicit threat of loss of risk-sharing advantages of debt contracts. Private debt credibly circulates as a form of inside money and, in general, is not valued as a speculative bubble; it is distinct from outside money. Competitive equilibria with self-enforcing debt exist under a suitable hypothesis of gains from trade.
    Keywords: Rate of interest ; self-enforcing debt ; reputational debt ;incomplete markets ;competitive equilibrium
    Date: 2018
  2. By: Ugur, Mehmet; Trushin, Eshref
    Abstract: Public subsidies are expected to stimulate business R&D investment by correcting market failures. However, the existing evidence varies considerably and the causes of heterogeneous effect sizes remain largely unexplored. We draw on the theory of contracts to argue that effect-size heterogeneity is due to different levels of informational rents that heterogeneous firm types can extract in a second-best environment of asymmetric information, risk aversion and incomplete contracting. Using two estimators and a panel dataset of 43,650 R&D-active UK firms from 1998-2012, we report that the effect of the subsidy on innovation inputs (i) is smaller or even negative during economic downturns; (ii) is positive among start-ups, younger and smaller firms, but negative among older and larger firms; and (iii) follows an inverted-U pattern when evaluated against the firm’s R&D intensity. Our findings are consistent across two estimation methods (propensity score matching and double robust estimators) and two innovation inputs (privately-funded R&D investment and employment of scientists and technicians).
    Keywords: Contract theory; treatment effect; R&D subsidy; innovation; additionality;
    Date: 2018–10–16
  3. By: Bruce Shearer; Nibene Habib Somé; Bernard Fortin
    Abstract: We measure the response of physicians to monetary incentives using matched administrative and time-use data on specialists from Québec (Canada). These physicians were paid fee-for-service contracts and supplied a number of different services. Our sample covers a period during which the Québec government changed the prices paid for clinical services. We apply these data to a multitasking model of physician labour supply, measuring two distinct responses. The first is the labour-supply response of physicians to broad-based fee increases. The second is the response to changes in the relative prices of individual services. Our results confirm that physicians respond to incentives in predictable ways. The own-price substitution effects of a relative price change are both economically and statistically significant. Income effects are present, but are overridden when prices are increased for individual services. They are more prominent in the presence of broad-based fee increases. In such cases, the income effect empirically dominates the substitution effet, which leads physicians to reduce their supply of clinical services.
    Keywords: Physician labour supply, multitasking, incentive pay.
    JEL: I10 J22 J33 J44
    Date: 2018
  4. By: Lang, Matthias (LMU Munich)
    Abstract: Consider managers evaluating their employees\' performances. Should managers justify their subjective evaluations? Suppose a manager\'s evaluation is private information. Justifying her evaluation is costly but limits the principal\'s scope for distorting her evaluation of the employee. I show that the manager justifies her evaluation if and only if the employee\'s performance was poor. The justification assures the employee that the manager has not distorted the evaluation downwards. For good performance, however, the manager pays a constant high wage without justification. The empirical literature demonstrates that subjective evaluations are lenient and discriminate poorly between good performance levels. This pattern was attributed to biased managers. I show that these effects occur in optimal contracts without any biased behavior.
    Keywords: communication; justification; subjective evaluation; centrality; leniency; disclosure;
    JEL: D82 D86 J41 M52
    Date: 2018–10–11

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