nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2018‒11‒19
five papers chosen by
Guillem Roig
University of Melbourne

  1. Long-Term Employment Relations When Agents are Present Biased By Englmaier, Florian; Fahn, Matthias; Schwarz, Marco
  2. How Important Is Price Variation Between Health Insurers? By Stuart V. Craig; Keith Marzilli Ericson; Amanda Starc
  3. Uncertainty and Robustness of Surplus Extraction By Giuseppe Lopomo; Luca Rigotti; Chris Shannon
  4. Measuring Physicians’ Response to Incentives: Evidence on Hours Worked and Multitasking By Bruce S. Shearer; Nibene Habib Somé; Bernard Fortin
  5. Completing Markets with Contracts: Evidence from the First Central Clearing Counterparty By Vuillemey, Guillaume

  1. By: Englmaier, Florian; Fahn, Matthias; Schwarz, Marco
    Abstract: We analyze how agents' present bias affects optimal contracting in an infinite-horizon employment setting. The principal maximizes profits by offering a menu of contracts to naive agents: a "virtual" contract - which agents plan to choose in the future - and a "real" contract which they end up choosing. This virtual contract motivates the agent and allows the principal to keep the agent below his outside option. Moreover, under limited liability, implemented effort can be inefficiently high. With a finite time horizon, the degree of exploitation of agents decreases over the life-cycle. While the baseline model abstracts from moral hazard, we show that the result persists also when allowing for non-contractible effort.
    Keywords: Dynamic Contracting; employment relations; present bias
    JEL: D03 D21 J31 M52
    Date: 2018–10
  2. By: Stuart V. Craig; Keith Marzilli Ericson; Amanda Starc
    Abstract: Prices negotiated between payers and providers affect a health insurance contract's value via enrollees' cost-sharing and self-insured employers' costs. However, price variation across payers is hard to observe. We measure negotiated prices for hospital-payer pairs in Massachusetts and characterize price variation. Between-payer price variation is similar in magnitude to between-hospital price variation. Administrative-services-only contracts, in which insurers do not bear risk, have higher prices. We model negotiation incentives and show that contractual form and demand responsiveness to negotiated prices are important determinants of negotiated prices.
    JEL: D4 I11 I13 L11 L4
    Date: 2018–10
  3. By: Giuseppe Lopomo; Luca Rigotti; Chris Shannon
    Abstract: This paper studies a robust version of the classic surplus extraction problem, in which the designer knows only that the beliefs of each type belong to some set, and designs mechanisms that are suitable for all possible beliefs in that set. We derive necessary and sufficient conditions for full extraction in this setting, and show that these are natural set-valued analogues of the classic convex independence condition identified by Cremer and McLean (1985, 1988). We show that full extraction is neither generically possible nor generically impossible, in contrast to the standard setting in which full extraction is generic. When full extraction fails, we show that natural additional conditions can restrict both the nature of the contracts a designer can offer and the surplus the designer can obtain.
    Date: 2018–11
  4. By: Bruce S. 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: 2018–05–31
  5. By: Vuillemey, Guillaume
    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: Central clearing; Contracts; incomplete markets; International trade
    JEL: F14 G23
    Date: 2018–10

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