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on Contract Theory and Applications |
| By: | Olivier Gu\'eant; Iuliia Manziuk; Jiang Pu |
| Abstract: | When firms want to buy back their own shares, they have a choice between several alternatives. If they often carry out open market repurchase, they also increasingly rely on banks through complex buyback contracts involving option components, e.g. accelerated share repurchase contracts, VWAP-minus profit-sharing contracts, etc. The entanglement between the execution problem and the option hedging problem makes the management of these contracts a difficult task that should not boil down to simple Greek-based risk hedging, contrary to what happens with classical books of options. In this paper, we propose a machine learning method to optimally manage several types of buyback contracts. In particular, we recover strategies similar to those obtained in the literature with partial differential equation and recombinant tree methods and show that our new method, which does not suffer from the curse of dimensionality, enables to address types of contract that could not be addressed with grid or tree methods. |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1907.09753&r=all |
| By: | Bastien Baldacci; Dylan Possama\"i; Mathieu Rosenbaum |
| Abstract: | Following the recent literature on make take fees policies, we consider an exchange wishing to set a suitable contract with several market makers in order to improve trading quality on its platform. To do so, we use a principal-agent approach, where the agents (the market makers) optimise their quotes in a Nash equilibrium fashion, providing best response to the contract proposed by the principal (the exchange). This contract aims at attracting liquidity on the platform. This is because the wealth of the exchange depends on the arrival of market orders, which is driven by the spread of market makers. We compute the optimal contract in quasi explicit form and also derive the optimal spread policies for the market makers. Several new phenomena appears in this multi market maker setting. In particular we show that it is not necessarily optimal to have a large number of market makers in the presence of a contracting scheme. |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1907.11053&r=all |
| By: | Nicholas Ryan (Cowles Foundation, Yale University) |
| Abstract: | Weak contract enforcement may reduce the efficiency of production 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 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2164r&r=all |
| By: | James Albrecht (Georgetown University); Xiaoming Cai (Tongji University); Pieter A. Gautier (Vrije Universiteit Amsterdam); Susan Vroman (Georgetown University) |
| Abstract: | We consider a labor market with search frictions in which workers make multiple applications and firms can post and commit to general mechanisms that may be conditioned both on the number of applications received and on the number of offers received by its candidate. When the contract space includes application fees, there exists a continuum of equilibria of which only one is socially efficient. In the inefficient equilibria, firms have market power that arises from the fact that the value of a worker's application portfolio depends on what other firms offer, which allows individual firms to free ride and offer workers less than their marginal contribution. Finally, by allowing for general mechanisms, we are able to examine the sources of inefficiency in the multiple applications literature. |
| Keywords: | multiple applications, directed search, competing mechanisms, efficiency, market power |
| JEL: | C78 D44 D83 |
| Date: | 2019–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20190054&r=all |
| By: | Lygnerud, Kristina; Wheatcroft, Edward; Wynn, Henry |
| Abstract: | Approximately 1.2 EJ of energy are potentially available for recovery each year from urban heat sources in the EU. This corresponds to more than 10 percent of the EU’s total energy demand for heat and hot water. There are, however, a number of challenges to be met before urban waste heat recovery can be performed on a wide scale. This paper focuses on the non-technical issues related to urban waste heat recovery and is written on the basis of opinions gathered from stakeholders in the field. Three non-technical issues are focused upon. First, a number of important barriers to wide scale urban waste recovery are identified, and where applicable, recommendations are made regarding how to overcome these barriers. Second, important issues and challenges regarding contract design are identified and discussed. Key elements of heat supply contracts between the district heating company and the owner of the waste heat are described. Finally, the impact on business models of properties specific to urban waste heat recovery are discussed. Data were collected from two separate sources, both related to the ReUseHeat Horizon 2020 project, which addresses the application of urban waste heat recovery in existing district heating networks. First, a number of interviews with stakeholders were carried out. Second, information was collected from demonstrator sites involved in the ReUseHeat project. It was concluded that, for urban waste heat recovery to be taken up on a wide scale, there is still a large amount of work to do to overcome these major issues. This paper is novel in that key non-technical issues of urban waste heat recovery are discussed from the perspective of a large sample of actual stakeholders and practitioners in the field. |
| Keywords: | urban waste heat recovery; contracts; barriers; business models |
| JEL: | R14 J01 |
| Date: | 2019–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:101286&r=all |