nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2019‒05‒13
three papers chosen by
Guillem Roig
University of Melbourne

  1. Incentivizing Learning-By-Doing: The Role of Compensation Schemes By Joshua S. Graff Zivin; Lisa B. Kahn; Matthew J. Neidell
  2. Implicit and Explicit Commitment in Credit and Saving Contracts: A Field Experiment By Uzma Afzal; Giovanna D'Adda; Marcel Fafchamps; Simon R. Quinn; Farah Said
  3. Principal-agent problem with multiple principals By Kaitong Hu; Zhenjie Ren; Junjian Yang

  1. By: Joshua S. Graff Zivin; Lisa B. Kahn; Matthew J. Neidell
    Abstract: In this paper, we examine the impact of pay-for-performance incentives on learning-by-doing. We exploit personnel data on fruit pickers paid under two distinct compensation contracts: a standard piece rate plan and a piece rate plan with an extra one-time bonus tied to output. Under the bonus contract, we observe bunching of performance just above the bonus threshold, suggesting workers distort their behavior in response to the discrete bonus. Such bunching behavior increases as workers gain experience. At the same time, the bonus contract induces considerable learning-by-doing for workers throughout the productivity distribution, and these improvements significantly outweigh the losses to the firm from the distortionary bunching. In contrast, under the standard piece rate contract, we find minimal evidence of bunching and only small performance improvements at the bottom of the productivity distribution. Our results suggest that contract design can help foster learning on the job. This underscores the importance of dynamic considerations in principal-agent models.
    JEL: J33 J43
    Date: 2019–05
  2. By: Uzma Afzal; Giovanna D'Adda; Marcel Fafchamps; Simon R. Quinn; Farah Said
    Abstract: We conduct a field experiment to test the demand for flexibility and for soft and hard commitment among clients of a microfinance institution. We offer a commitment contract inspired by the rotating structure of a ROSCA. Additional treatments test ex ante demand for soft commitment (in the form of reminders), hard commitment (in the form of a penalty for missing an installment), and flexibility (an option to postpone an installment). Our design is unique in the literature for allowing us to test — using the same respondent population — how demand for explicit commitment features differs between loan and savings contracts. We find substantial demand for both credit and savings contracts but no demand for additional commitment features — either in isolation or in combination — in spite of their effectiveness in improving repayment. In particular, demand for savings is insensitive to explicit commitment features. Individuals offered loans actively dislike commitment and flexibility, unless the latter is combined with reminders. These findings complement a literature showing that commitment devices induce financial discipline. They show that demand for commitment depends on whether commitment features are implicit or explicit.
    JEL: G02 O16
    Date: 2019–05
  3. By: Kaitong Hu (CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique); Zhenjie Ren (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique); Junjian Yang (Fakultät für Mathematik und Geoinformation [Wien] - TU Wien - Technische Universität Wien)
    Abstract: We consider a moral hazard problem with multiple principals in a continuous-time model. The agent can only work exclusively for one principal at a given time, so faces an optimal switching problem. Using a randomized formulation, we manage to represent the agent's value function and his optimal effort by an Itô process. This representation further helps to solve the principals' problem in case we have infinite number of principals in the sense of mean field game. Finally the mean field formulation is justified by an argument of propagation of chaos.
    Keywords: Moral hazard,contract theory,backward SDE,optimal switching,mean field games,propagation of chaos
    Date: 2019–04–02

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