nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2019‒02‒11
five papers chosen by
Guillem Roig
University of Melbourne

  1. Different Strokes for Different Folks: Experimental Evidence on the Effectiveness of Input and Output Incentive Contracts for Health Care Providers with Varying Skills By Manoj Mohanan; Katherine Donato; Grant Miller; Yulya Truskinovsky; Marcos Vera-Hernández
  2. Organizing Competition for the Market By Iossa, Elisabetta; Rey, Patrick; Waterson, Michael
  3. Prevention efforts, insurance demand and price incentives under coherent risk measures By Sarah Bensalem; Nicolás Hernández Santibáñez; Nabil Kazi-Tani
  4. How to apply penalties to avoid delays in projects By Bergantiños, Gustavo; Lorenzo, Leticia
  5. Non-linear Incentives and Worker Productivity and Earnings: Evidence from a Quasi-experiment By Richard B. Freeman; Wei Huang; Teng Li

  1. By: Manoj Mohanan; Katherine Donato; Grant Miller; Yulya Truskinovsky; Marcos Vera-Hernández
    Abstract: A central issue in designing performance incentive contracts is whether to reward the production of outputs versus use of inputs: the former rewards efficiency and innovation in production, while the latter imposes less risk on agents. Agents with varying levels of skill may perform better under different contracts as well – more skilled workers may be better able to innovate, for example. We study these issues empirically through an experiment enabling us to observe and verify outputs (health outcomes) and inputs (adherence to recommended medical treatment) in Indian maternity care. We find that both output and input incentive contracts achieved comparable reductions in post-partum hemorrhage rates, the dimension of maternity care most sensitive to provider behavior and the largest cause of maternal mortality. Interestingly, and in line with theory, providers with advanced qualifications performed better and used new strategies under output incentives, while under input incentives, providers with and without advanced qualifications performed equally.
    JEL: D86 J41 O15
    Date: 2019–01
  2. By: Iossa, Elisabetta; Rey, Patrick; Waterson, Michael
    Abstract: The paper studies competition for the market in a setting where incumbents (and, to a lesser extent, neighboring incumbents) benefi t from a cost advantage. The paper fi rst compares the outcome of staggered and synchronous tenders, before drawing the implications for market design. We find that the timing of tenders should depend on the likelihood of monopolization. When monopolization is expected, synchronous tendering is preferable, as it strengthens the pressure that entrants exercise on the monopolist. When instead other fi rms remain active, staggered tendering is preferable, as it maximizes the competitive pressure that comes from the other firms.
    Keywords: Dynamic procurement; incumbency advantage; local monopoly; competition; asymmetric auctions; synchronous contracts; staggered contracts
    JEL: D44 H40 H57 L43 L51 R48
    Date: 2019–01
  3. By: Sarah Bensalem (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon); Nicolás Hernández Santibáñez (Department of Mathematics - University of Michigan - University of Michigan [Ann Arbor]); Nabil Kazi-Tani (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)
    Abstract: This paper studies an equilibrium model between an insurance buyer and an insurance seller, where both parties' risk preferences are given by convex risk measures. The interaction is modeled through a Stackelberg type game, where the insurance seller plays first by offering prices, in the form of safety loadings. Then the insurance buyer chooses his optimal proportional insurance share and his optimal prevention effort in order to minimize his risk measure. The loss distribution is given by a family of stochastically ordered probability measures, indexed by the prevention effort. We give special attention to the problems of self-insurance and self-protection. We prove that the formulated game admits a unique equilibrium, that we can explicitly solve by further specifying the agents criteria and the loss distribution. In self-insurance, we consider also an adverse selection setting, where the type of the insurance buyers is given by his loss probability, and study the screening and shutdown contracts. Finally, we provide case studies in which we explicitly apply our theoretical results.
    Keywords: Coherent risk measures,Stackelberg game,Prevention,Self-insurance,Self-protection
    Date: 2019–01–16
  4. By: Bergantiños, Gustavo; Lorenzo, Leticia
    Abstract: A planner wants to carry out a project involving several firms. In many cases the planner, for instance the Spanish Administration, includes in the contract a penalty clause that imposes a payment per day if the firms do not complete their activities or the project on time. We discuss two ways of including such penalty clauses in contracts. In the first the penalty applies only when the whole project is delayed. In the second the penalty applies to each firm that incurs a delay even if the project is completed on time. We compare the two penalty systems and find that the optimal penalty (for the planner) is larger in the second method, the utility of the planner is always at least as large or larger in the second case and the utility of the firms is always at least as large or larger in the first. Surprisingly, the final delay in the project is unrelated to which penalty system is chosen.
    Keywords: game theory; PERT; delays; penalties
    JEL: C72
    Date: 2019–01–25
  5. By: Richard B. Freeman; Wei Huang; Teng Li
    Abstract: Firms often use non-linear incentive systems to motivate workers to achieve specified goals, such as paying bonuses to reach targets in sales, production, or cost reduction. Using administrative data from a major Chinese insurance firm that raised its sales targets and rewards for insurance agents greatly in 2015, we find that increased incentives induced agents to increase sales of the increasingly incentivized life insurance products, bunched around the new targets, albeit in part with some low quality sales that led to canceled contracts, while reducing sales of products out-side the new incentive system. The greater non-linear incentives raised agent incomes and low-ered turnover and substantially increased firm revenues net of the increase in payments to agents. The stock market reacted to the new system with a jump in the firms’ share price relative to its main competitor by 15-20% in the days surrounding introduction of the new system.
    JEL: J00 J22 J3 M5 M52
    Date: 2019–01

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