nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2018‒12‒10
six papers chosen by
Guillem Roig
University of Melbourne

  1. Organizing Global Supply Chains: Input Cost Shares and Vertical Integration By Giuseppe Berlingieri; Frank Pisch; Claudia Steinwender
  2. Analysing Group Contract Design Using a Lab and a Lab-in-the-Field Threshold Public Good Experiment By Bouma, J.A.; Nguyen, Binh; van der Heijden, Eline; Dijk, J.J.
  3. The Causal Effect of Trust By Bartling, Björn; Fehr, Ernst; Huffman, David B.; Netzer, Nick
  4. M&A Advisory and the Merger Review Process By Michele Bisceglia; Salvatore Piccolo; Emanuele Tarantino
  5. Gaining Experience as Principal or Agent. An Experimental Study By Giovanni Ponti; Marcello Sartarelli; Iryna Sikora; Zhukova Vita
  6. On the Values of Bayesian Cooperative Games with Sidepayments By Salamanca, Andrés

  1. By: Giuseppe Berlingieri; Frank Pisch; Claudia Steinwender
    Abstract: We study whether and how the technological importance of an input – measured by its cost share – is related to the decision of whether to “make” or “buy” that input. Using detailed French international trade data and an instrumental variable approach based on self-constructed IO tables, we show that French multinationals vertically integrate those inputs that have high cost shares. A stylized incomplete contracting model with both ex ante and ex post inefficiencies explains why: technologically more important inputs are “made” when transaction cost economics type forces (TCE; favoring integration) overpower property rights type forces (PRT; favoring outsourcing). Additional results related to the contracting environment and headquarters intensity consistent with our theoretical framework show that both TCE and PRT type forces are needed to fully explain the empirical patterns in the data.
    JEL: F10 F14 F23 L16 L22 L23 O14
    Date: 2018–11
  2. By: Bouma, J.A. (Tilburg University, Center For Economic Research); Nguyen, Binh (Tilburg University, Center For Economic Research); van der Heijden, Eline (Tilburg University, Center For Economic Research); Dijk, J.J.
    Abstract: This paper presents the results of a threshold public goods game experiment with heterogeneous players. The experiment is designed in close collaboration with the Dutch association of agri-environmental farmer collectives. Subjects are recruited at a university (“the lab”) and a farm management training centre (“lab-in-the-field”). The treatments have two different distribution rules which are varied in a within-subjects manner. After subjects have experienced both, they can vote for one of the two rules: either a differentiated bonus that results in equal payoff for all, or an undifferentiated, equal share of the group bonus. In a between-subjects manner, subjects can vote for a (minimum or average) threshold or are faced with an exogenous threshold. The results indicate that exogenous thresholds perform better, possibly because the focal point they provide facilitates coordination. With regard to the two distribution rules, the results are mixed: average contributions and payoffs are higher in the lab under the ‘equal-payoff’ rule, but there is no significant difference between the two in the lab-in-the-field, possibly because contributions in the lab-in-the-field are much less efficient. Overall, our results suggest that environmental payment schemes should not only consider farmer heterogeneity in the design of group contracts, but pay explicit attention to coordination problems as well.
    Keywords: Threshold public good games; endogenous choice; lab-in-the-field; collective agri-envorenmental management; group contracts; distribution rules; heterogeneous subjects
    JEL: H41 C92 C93 D70 Q57
    Date: 2018
  3. By: Bartling, Björn (University of Zurich); Fehr, Ernst (University of Zurich); Huffman, David B. (University of Pittsburgh); Netzer, Nick (University of Zurich)
    Abstract: Trust affects almost all human relationships – in families, organizations, markets and politics. However, identifying the conditions under which trust, defined as people's beliefs in the trustworthiness of others, has a causal effect on the efficiency of human interactions has proven to be difficult. We show experimentally and theoretically that trust indeed has a causal effect. The duration of the effect depends, however, on whether initial trust variations are supported by multiple equilibria. We study a repeated principal-agent game with multiple equilibria and document empirically that an efficient equilibrium is selected if principals believe that agents are trustworthy, while players coordinate on an inefficient equilibrium if principals believe that agents are untrustworthy. Yet, if we change the institutional environment such that there is a unique equilibrium, initial variations in trust have short-run effects only. Moreover, if we weaken contract enforcement in the latter environment, exogenous variations in trust do not even have a short-run effect. The institutional environment thus appears to be key for whether trust has causal effects and whether the effects are transient or persistent.
    Keywords: trust, causality, equilibrium selection, belief distortions, incomplete contracts, screening, institutions
    JEL: C91 D02 D91 E02
    Date: 2018–10
  4. By: Michele Bisceglia (Università di Bergamo); Salvatore Piccolo (Università di Bergamo and CSEF); Emanuele Tarantino (University of Mannheim, MaCCI and CEPR)
    Abstract: Two firms propose a merger to the antitrust authority. They are uninformed about the efficiencies generated by the merger, but can hire an expert to gather information on their behalf. The authority is also uninformed about the merger's efficiencies, but can run a costly internal investigation to learn them. We analyze the effect of the disclosure of the expert's contract on consumer welfare, and show that consumers are not necessarily better off with disclosure. This negative effect hinges on a free-riding problem between expert and authority in the information acquisition game, and is more relevant in highly competitive industries.
    Keywords: Advice, Competition Policy, Mergers, Advisory Contract, Disclosure.
    JEL: D43 L11 L42 L81
    Date: 2018–11–26
  5. By: Giovanni Ponti (Universidad de Alicante); Marcello Sartarelli (Dpto. Fundamentos del Análisis Económico); Iryna Sikora (KPMG España); Zhukova Vita (Dpto. Fundamentos del Análisis Económico)
    Abstract: We study experimentally whether decisions in a principal-agent model differ when subjects gain experience by changing roles rather being in a ¿xed role over time. In addition, we examine whether increasing principals’ pro¿t opportunities has an impact on their decisions. To this aim, we use a stylised labour market where multiple principals compete to hire teams of two agents by o¿ering wage contracts and claiming residual pro¿ts after paying agents. Players’ roles, either assigned randomly every round or ¿xed, and principals’ pro¿t opportunities, either high or low, vary in a between-subject design. We ¿nd that both changing roles and facing high pro¿t opportunities leads principals to o¿er more frequently e¿cient contracts in inducing both agents to put e¿ort and to higher payo¿s for everyone, with some complementarity between role changes and pro¿t opportunities.
    Keywords: direct-response method, experience, ¿xed role, laboratory experiment, principal-agent, pro¿t opportunities, role change, stakes size
    JEL: C91 C92 D8 J41
    Date: 2018–11
  6. By: Salamanca, Andrés (Department of Business and Economics)
    Abstract: In this paper we explore the relationship between several value-like solution concepts for cooperative games with incomplete information and utility transfers in the form of sidepayments. In our model, state-contingent contracts are required to be incentive compatible, and thus utility might not be not fully transferable (as it would be in the complete information case). When we restrict our attention to games with orthogonal coalitions (i.e., which do not involve strategic externalities), our first main result states that Myerson’s [Cooperative games with incomplete information. Int. J. Game Theory. (1984), 13, 69-96] generalization of the Shapley NTU value and Salamanca’s [A generalization of the Harsanyi NTU value to games with incomplete information. (2016), HAL 01579898] extension of the Harsanyi NTU value are interim utility equivalent. If we allow for arbitrary informational and strategic externalities, our second main result establishes that the ex-ante evaluation of Myerson’s solution equals Kalai and Kalai’s [Cooperation in strategic games revisited. Q. J. Econ. (2013) 128, 917-966] cooperative-competitive value in two-player games with verifiable types.
    Keywords: Cooperative games; incomplete information; sidepayments
    JEL: C71 C78 D82
    Date: 2018–11–26

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