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on Contract Theory and Applications |
| By: | Kusterer, David J.; Schmitz, Patrick W. |
| Abstract: | Who should own public projects? We report data from a laboratory experiment with 480 participants that was designed to test Besley and Ghatak's (2001) public-good version of the Grossman-Hart-Moore property rights theory. Consider two parties, one of whom can invest in the provision of a public good. The parties value the public good differently. Besley and Ghatak (2001) argue that more investments will be made if the high-valuation party is the owner, regardless of whether or not this party is the investor. While our experimental results provide support for the Grossman-Hart-Moore theory, they cast some doubts on the robustness of Besley and Ghatak's (2001) conclusion. |
| Keywords: | Incomplete Contracts; Investment incentives; Laboratory experiments; Property rights; Public Goods |
| JEL: | C92 D23 D86 H41 L33 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13204&r=cta |
| By: | Pei-Cheng Yu (School of Economics, UNSW Business School, UNSW Sydney) |
| Abstract: | This paper studies sequential price discrimination of sophisticated present-biased consumers in the credit market. The optimal contract utilizes present bias to improve screening by inducing certain consumers to over-consume and over-accumulate debt without the presence of naivete. This shows that the optimal contract can have seemingly exploitative features that cause certain consumers to experience ex-post welfare losses even when they are sophisticated. This has important policy implications. If the intention of firms is to screen and not exploit consumers, then financial regulations aimed at protecting consumers by eliminating seemingly exploitative features could introduce additional distortions. I also analyze the optimal contract for naive consumers. The main difference between contracts for sophisticated and naıve consumers is the lack of a commitment mechanism in exploitative contracts, while the presence of teaser rates, late fees or overdraft fees does not necessarily make contracts exploitative. |
| Keywords: | Credit contract, Financial regulations, Non-linear pricing, Present bias, Sequential screening |
| JEL: | D18 D82 D86 G28 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2018-15&r=cta |
| By: | Biais, Bruno; Heider, Florian; Hoerova, Marie |
| Abstract: | Protection buyers use derivatives to share risk with protection sellers, whose assets are only imperfectly pledgeable because of moral hazard. To mitigate moral hazard, privately optimal derivative contracts involve variation margins. When margins are called, protection sellers must liquidate some of their own assets. We analyse, in a general-equilibrium framework, whether this leads to inefficient fire sales. If investors buying in a fire sale interim can also trade ex ante with protection buyers, equilibrium is information-constrained efficient even though not all marginal rates of substitution are equalized. Otherwise, privately optimal margin calls are inefficiently high. To address this inefficiency, public policy should facilitate ex-ante contracting among all relevant counterparties. |
| Keywords: | constrained efficiency; fire sales; macro-prudential regulation; Pecuniary externalities; variation margins |
| JEL: | D62 D82 G13 G18 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13192&r=cta |
| By: | Kalnins, Arturs; Lin, Stephen; Thomas, Catherine |
| Abstract: | This paper analyzes how firms are organized in the U.S. hotel management industry. For most hotel brands, properties with intermediate room occupancy rates are relatively more likely to be managed by company employees rather than by independent franchisees. Properties with the lowest and the highest occupancy rates tend to be managed by franchisees, at arm's length from the hotel chain. This variation in organizational form is consistent with a model in which the incentives embodied in management contracts vary with property-level productivity. We infer that most hotel chains franchise low productivity relationships to keep property-level fixed costs low and franchise the most productive relationships to create high powered incentives for franchisees. Franchisees of high-productivity properties work harder than the managers of both chain-managed properties and low-productivity franchises because the performance incentives in franchise contracts are proportional to hotel revenues and complement the incentives arising from having control over the property. |
| Keywords: | Firm Heterogeneity; firm structure; Incomplete Contracts; Outsourcing |
| JEL: | D22 D23 F12 L23 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13190&r=cta |
| By: | Fahn, Matthias (JKU Linz); Hakenes, Hendrik (University of Bonn) |
| Abstract: | We show that team formation can serve as an implicit commitment device to overcome problems of self-control. If individuals have present-biased preferences, effort that is costly today but rewarded at some later point in time is too low from the perspective of an individual\'s long-run self. If agents interact repeatedly and can monitor each other, a relational contract involving teamwork can help to improve performance. The mutual promise to work harder is credible because the team breaks up after an agent has not kept this promise - which leads to individual underproduction in the future, reducing future utility. |
| Keywords: | self-control problems; teamwork; relational contracts; |
| JEL: | L22 L23 |
| Date: | 2018–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:126&r=cta |