nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2019‒02‒18
three papers chosen by
Guillem Roig
University of Melbourne

  1. Shared Ownership in the International Make or Buy Dilemma By Charlie Joyez
  2. Contract Enforcement and Productive Efficiency: Evidence from the Bidding and Renegotiation of Power Contracts in India By Nicholas Ryan
  3. Dual Labour Markets Revisited By Samuel Bentolila; Juan Jose Dolado; Juan F. Jimeno

  1. By: Charlie Joyez (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: The traditional Grossman-Hart-Moore Property Right Theory of the firm and subsequent works do not consider shared ownership as an optimal solution because of the incentives losses it would carry. This paper provides an extension of Antràs & Helpman (2008) international integration dilemma under partially incomplete contracts to joint-ventures (JVs), and identifies several cases where JVs are optimal for foreign investors.The model insists on the interaction between firm-level and country-level parameters, with higher productivity giving increasing access to higher control in countries with stronger contractual enforceability, consistent with empirical observations. Potential heterogeneous spillovers effects can be deduced from this framework.
    Keywords: Property Right Theory, International Joint Ventures, Contracting Institutions, Firms Heterogeneity, Multinational Enterprises
    JEL: D23 F23 L23
    Date: 2019–02
  2. By: Nicholas Ryan (Cowles Foundation, Yale University)
    Abstract: Weak contract enforcement may reduce the efficiency of investment in developing countries. I study how contract enforcement affects efficiency in procurement auctions for the largest power projects in India. I gather data on bidding and ex post contract renegotiation and find that the renegotiation of contracts in response to cost shocks is widespread, despite that bidders are allowed to index their bids to future costs like the price of coal. Connected firms choose to index less of the value of their bids to coal prices and, through this strategy, expose themselves to cost shocks to induce renegotiation. I use a structural model of bidding in a scoring auction to characterize equilibrium bidding when bidders are heterogeneous both in cost and in the payments they expect after renegotiation. The model estimates show that bidders offer power below cost due to the expected value of later renegotiation. The model is used to simulate bidding and efficiency with strict contract enforcement. Contract enforcement is found to be pro-competitive. With no renegotiation, equilibrium bids would rise to cover cost, but markups relative to total contract value fall sharply. Production costs decline, due to projects being allocated to lower-cost bidders over those who expect larger payments in renegotiation.
    Keywords: Contracting, Procurement, Commitment
    JEL: O25 L94 L14 D44
    Date: 2019–02
  3. By: Samuel Bentolila; Juan Jose Dolado; Juan F. Jimeno
    Abstract: This paper provides an overview of recent research on dual labour markets. Theoretical and empirical contributions on the labour-market effects of dual employment protection legislation are revisited, as well as factors behind its resilience and policies geared towards correcting its negative consequences. The topics covered include the stepping-stone or dead-end nature of temporary contracts, their effects on employment, unemployment, churn, training, productivity growth, wages, and labour market inflows and outflows. The paper reviews both theoretical advances and relevant policy discussions, in particular in several countries that had very poor employment performance during the recent global economic and financial crisis.
    Keywords: dual labour markets, employment protection, temporary contracts, job creation, job destruction, churn
    JEL: J23 J32 J63
    Date: 2019

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