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on Contract Theory and Applications |
| By: | Victor H. Gonzalez-Jimenez |
| Abstract: | I introduce a contract designed to take advantage of the regularity that individuals distort probabilities. With this contract, the principal could activate the probability distortions that are inherent in the agent and use these distortions to incentivize the agent to perform a relevant task. This is because in the contract, the principal could choose the probability that the agent’s compensation depends on his own performance on the task. Distortions of such probability generate higher or lower motivation toper form the task. A theoretical framework and an experiment demonstrate that the proposed contract yields higher output than a traditional contract when both contracts o?er similar monetary incentives. However, the probability speci?ed by the principal is critical to achieving this result. Small probabilities yield higher levels of performance, whereas medium or high probabilities yield no performance di?erences between the contracts. The degree to which individuals overweight small probabilities explains these ?ndings. |
| JEL: | C91 C92 J16 J24 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:1901&r=all |
| By: | Kalnins, Arturs; Lin, Stephen F.; 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: | D2 D23 F12 L23 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:91702&r=all |
| By: | Joshua S. Gans |
| Abstract: | One of the purported benefits of blockchain technologies is the ability to house what have been termed ‘smart’ contracts. Such contracts are potentially self-executing depending on the state of information recorded on a blockchain ledger. This paper examines the capabilities of smart contracts from an economic perspective. It is demonstrated that by improving observability and reducing the costs of verification of contract obligation performance, the space of feasible contracts can be enlarged. Moreover, by providing commitments to various monetary payments, a blockchain can potentially create a foundation to house certain mechanisms that have been shown to overcome difficulties of contractual incompleteness. This is demonstrated using a simple international trade environment. Thus, even though smart contracts must respect the incentives of decision-makers in their obligations, they have the potential to use easily verifiable elements to create incentives to reduce hold-up and other contractual difficulties. |
| JEL: | D86 K12 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25443&r=all |
| By: | Barney Hartman-Glaser; Benjamin M. Hébert |
| Abstract: | We model the widespread failure of contracts to share risk using available indices. A borrower and lender can share risk by conditioning repayments on an index. The lender has private information about the ability of this index to measure the true state the borrower would like to hedge. The lender is risk averse, and thus requires a premium to insure the borrower. The borrower, however, might be paying something for nothing, if the index is a poor measure of the true state. We provide sufficient conditions for this effect to cause the borrower to choose a non-indexed contract instead. |
| JEL: | D82 D86 G21 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25450&r=all |