nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2019‒06‒10
four papers chosen by
Guillem Roig
University of Melbourne

  1. Incentivizing Learning-By-Doing: The Role of Compensation Schemes By Graff Zivin, Joshua; Kahn, Lisa B.; Neidell, Matthew
  2. Outsourcing Public Services: Contractibility, Cost, and Quality By Andersson, Fredrik; Jordahl, Henrik; Josephson, Jens
  3. A new societal contract By Snower, Dennis J.
  4. Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract By Levy, Daniel; Young, Andrew T.

  1. By: Graff Zivin, Joshua (University of California, San Diego); Kahn, Lisa B. (Yale University); Neidell, Matthew (Columbia University)
    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.
    Keywords: contracts, learning-by-doing
    JEL: J33 J43
    Date: 2019–04
  2. By: Andersson, Fredrik (Lund University); Jordahl, Henrik (Örebro University School of Business); Josephson, Jens (Research Institute of Industrial Economics (IFN))
    Abstract: We review the literature on public sector outsourcing to explore if the theoretical predictions from the incomplete contracts literature hold up to recent empirical evidence. Guided by theory, we arrange services according to the type and magnitude of their contractibility problems. The empirical studies point at rather favourable outsourcing outcomes, in terms of costs and quality, for services without severe contracting problems. The picture is more mixed for services with tougher contracting problems, with the weight of the evidence in favour of public provision. This difference between services is largely in line with the property-rights framework and theories of incomplete contracts.
    Keywords: privatization; property rights; publicly provided goods
    JEL: D23 H11 L33
    Date: 2019–05–29
  3. By: Snower, Dennis J.
    Abstract: This paper argues that the traditional societal contract that underlies the market economy has run its course and needs to be replaced by a new contract, based on a new conception of the "empowering economy." Whereas different societal contracts are relevant to different societies, there must be some features that all societal contracts will have in common, in order to address some basic human needs that every thriving society must satisfy and to promote popular approval for multilateral agreements to address multilateral problems. The paper proposes a new societal contract that promotes three building blocks of economic policies: (1) automatic stabilizers that reduce inequalities of economic power, (2) policies that focus not just on material prosperity, but also on personal and social empowerment and (3) policies that develop the human capabilities of cooperation and innovation.
    Keywords: societal contract,empowerment,social cohesion,inequality,cooperation,innovation,free markets,welfare state,incentives
    JEL: O31 P11 P12 P16 P41 P47 P48 P51
    Date: 2019
  4. By: Levy, Daniel; Young, Andrew T.
    Abstract: We study the cost of breaching an implicit contract in a goods market, building on a recent study that documented the presence of such a contract in the Coca-Cola market, in the US, during 1886‒1959. The implicit contract promised a serving of Coca-Cola of a constant quality (the “real thing”), and of a constant quantity (6.5oz in a bottle or from the fountain), at a constant nominal price of 5¢. We offer two types of evidence. First, we document a case that occurred in 1930, where the Coca-Cola Company chose to incur a permanently higher marginal cost of production, instead of a one-time increase in the fixed cost, to prevent a quality adjustment of Coca-Cola, which would be considered a breach of the implicit contract. Second, we explore the consequences of the Company’s 1985 decision to replace the original Coke with the “New Coke.” Using the model of Exit, Voice, and Loyalty (Hirschman 1970), we argue that the unprecedented public outcry that followed the New Coke’s introduction, was a response to the Company’s breaching of the implicit contract. We document the direct and quantifiable costs of this implicit contract breach, and demonstrate that the indirect, although unquantifiable, costs in terms of lost customer goodwill were substantial.
    Keywords: Implicit Contract,Cost of Breaching a Contract,Cost of Breaking a Contract,Invisible Handshake,Customer Market,Sticky Prices,Long-Term Relationship,Coca-Cola,Nickel Coke,Price Rigidity,Secret Formula
    JEL: A14 E12 E31 K10 L14 L16 L66 M30 N80
    Date: 2019

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