nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2019‒05‒27
four papers chosen by
Guillem Roig
University of Melbourne

  1. Reciprocity in dynamic employment relationships By Matthias Fahn
  2. Endogenous Social Preferences in Bargaining and Contract Enforcement By Tetsuo Yamamori; Kazuyuki Iwata
  3. Hospital Competition in the Netherlands : An Empirical Investigation By Berden, Carolien; Croes, R.; Kemp, R.; Mikkers, Misja; van der Noll, Rob; Shestalova, V.; Svitak, Jan
  4. Testing for collusion in bus contracting in London By Waterson, Michael; Xie, Jian

  1. By: Matthias Fahn
    Abstract: This paper explores how a relational contract establishes a norm of reciprocity and how such a norm shapes the provision of informal incentives. Developing a model of a long-term employment relationship, I show that generous upfront wages that activate the norm of reciprocity are more important when an employee is close to retirement. In earlier stages, direct incentives promising a bonus in exchange for effort are more effective. Then, a longer remaining time horizon increases the employer’s commitment. Generally, direct and reciprocity-based incentives reinforce each other and should thus optimally be used in combination. I also show that more competition can magnify the use of reciprocity-based incentives. Moreover, with asymmetric information on the employee’s responsiveness to the norm of reciprocity, an early separation of types is generally optimal. Then, the principal might benefit from asymmetric information because a firing threat is only credible if the employee potentially is not reciprocal.
    Keywords: reciprocity, relational contracts, dynamic incentives
    JEL: C73 D21 D22 D86 D90 D91
    Date: 2019
  2. By: Tetsuo Yamamori; Kazuyuki Iwata
    Abstract: In this study, we explore the impact of the endogenous nature of social preferences in bargaining on contract enforcement. For this purpose, we conduct laboratory experiments based on a one-shot gift exchange game in the context of firm-worker relationships. Our design admits two types of worker proposals on the contracts to his/her firm, defined as cheap talk. One contains only the desirable wage of the worker, while the other additionally contains his/her future effort. We find that worker preferences become biased in a more self-serving direction by making proposals in bargaining. That is, both types of worker cheap talk undermine reciprocity, thus deteriorating efficiency in an incomplete contract. Additional experiments show that the negative effect of cheap talk in bargaining is robust even for repeated interactions. By contrast, worker proposals including future efforts lead to successful coordination, which outweigh the negative effect on reciprocal behaviors.
    Date: 2019–05
  3. By: Berden, Carolien; Croes, R.; Kemp, R.; Mikkers, Misja (Tilburg University, TILEC); van der Noll, Rob; Shestalova, V. (Tilburg University, TILEC); Svitak, Jan (Tilburg University, TILEC)
    Abstract: The Dutch government introduced managed competition to the health care sec- tor in 2006. In this regulatory framework insurers compete for enrollees and providers compete for contracts with insurers. The resulting contracts are de- termined by bargaining, which outcome depends on the relative position of the provider. In this paper, we compare how commonly used market power indi- cators predict bargaining outcomes. We combine 2013 transaction data with bilateral contract data. Our empirical models explain the relative dierences in hospitals' revenues while controlling for dierences in the complexity of patients. Four indicators are used: the logit competition index (LOCI), willingness-to-pay (WTP), Elzinga-Hogarty market share and a rule-of-thumb market share. We nd that WTP and LOCI perform best empirically.
    Keywords: hospital competition; market power; bargaining
    JEL: I11 L44 L13 D22
    Date: 2019
  4. By: Waterson, Michael (University of Warwick); Xie, Jian (University of Warwick)
    Abstract: We investigate the London bus market, a large market with regular procurement of bus services, for possible collusion using a wide variety of techniques, making use of the data at our disposal. There is little evidence of collusion in bidding for contracts apparent from our data, despite some features of the market that might lead to collusive behaviour.
    Keywords: Cartel behaviour ; Procurement ; Detecting Cartels ; Bus market
    JEL: D44 L41 L92 D22
    Date: 2019

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