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on Contract Theory and Applications |
| By: | Florian Hoffmann; Roman Inderst; Sergey Turlo |
| Abstract: | Embedding consumer experimentation with a product or service into a market environment, we find that unregulated contracts induce too little returns or cancellations, as they do not internalize a pecuniary externality on other firms in the market. Forcing firms to let consumers learn longer by imposing a commonly observed statutory minimum cancellation or refund period is socially efficient only when firms appropriate much of the market surplus, while it backfires otherwise. Interestingly, cancellation rights are a poor predictor of competition, as in the unregulated outcome firms grant particularly generous rights when competition is neither too low nor too high. The overarching theme of our analysis is that both the individual benefits and the welfare consequences of (consumer) experimentation depend crucially on the consumer's reservation value, which is endogenous in a market environment. |
| Keywords: | Consumer experimentation, cancellation rights, market equilibrium, externality, regulation, consumer protection |
| JEL: | D82 D86 L51 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2018_045&r=all |
| By: | Junbeom Lee; Stephan Sturm; Chao Zhou |
| Abstract: | We propose a risk-sharing framework for bilateral contracts to find the optimal pair, initial price and amount of collateral, with presence of default risks, collateral, and funding spreads. The derived optimal collateral can be used for contracts between financial firms and non-financial firms. For inter-dealers contracts, which are governed by regulations, the optimal collateral can interpret circumstances where the margin requirement is indeed optimal. We will see later that absence of market frictions is an inherent assumption for the margin requirement in Basel III. In addition, as we consider entity-specific information in bilateral pricing, law of one price does not hold. Moreover, inclusion of funding spreads causes asymmetry in individual pricing. Thus, the two parties should enter derivative contracts with a negotiated price, which is the other part of the solution of the risk-sharing framework. The risk-sharing framework defines the negotiation as a problem that maximizes the sum of utilities of the two parties. The optimal price from the risk-sharing framework does not have asymmetry due to different funding spreads of each party. |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1901.03874&r=all |
| By: | Shourya Sen; Richard Adelstein (Department of Economics, Wesleyan University) |
| Abstract: | We examine the evolution of fishing rights in colonial Bengal through a series of cases heard at the Calcutta High Court in the 1880s and culminating in the passage of legislation in 1889. We posit an implicit relational contract between the colonizing British and the landowning class in colonial Bengal as a way to understand the concurrent evolution of fishing rights and institutions of governance in the region. The system of incentives created by this contract determined the development of fishing rights at a crucial moment in the history of colonial Bengal and, more broadly, became a primary mechanism of institutional change in the region. The analysis also shows the Calcutta High Court to have acted, albeit in vain, as a truly independent judiciary. |
| Keywords: | fishing rights, state formation, relational contracts, colonialism, credible commitments |
| JEL: | N55 O13 P48 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:wes:weswpa:2019-001&r=all |
| By: | Filippo Belloc |
| Abstract: | We develop a simple incomplete-contract model of the relationship between worker participation to revenue sharing and innovation performance of firms, under firing regimes with different stringency. Stronger worker participation to profits is shown to increase innovation probability when employer-side hold-up is prevented by stringent layoff regulation and the human capital matters signicantly. Vice-versa, under a strict layoff regulation, when the financial capital is relatively more important, the effects of worker participation devices may be reduced or inverted. Our results may help in understanding why there is no one-size-fits-all optimal strategy in the design of worker financial participation mechanisms for knowledge-intensive productions |
| Keywords: | prot-sharing, dismissal regulation, hold-up, innovation. |
| JEL: | J54 K31 O31 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:799&r=all |
| By: | Zhengqing Gui; Ernst-Ludwig von Thadden; Xiaojian Zhao |
| Abstract: | We characterize an optimal financial contract when the firm’s realized cash flow is unobservable to the investor and the firm’s collateral can only be liquidated partially by resorting to the services of a costly third party. An optimal contract may exhibit a piecewise structure and vary with the liquidation cost and the firm’s actual liquidity shortage. Partial liquidation and wholesale transfers of collateral can coexist in an optimal contract. In contrast to part of the literature, the incentive-compatibility constraint incorporates the firm’s limited liability, and may be slack at the optimum. Allowing the firm to overcome an ex-post liquidity shortage by borrowing surreptitiously from a third party may reduce the firm’s ex-ante expected utility. |
| Keywords: | Financial contracting, incentive-compatibility, limited liability, indivisible collateral, costly liquidation |
| JEL: | D86 G33 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2018_064&r=all |