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on Contract Theory and Applications |
| By: | Sanjit Dhami; Junaid Arshad; Ali al-Nowaihi |
| Abstract: | Microfinance contracts have enormous economic and welfare significance. We study, theoretically and empirically, the problem of effort choice under individual liability (IL) and joint liability (JL) contracts when loan repayments are made either privately, or publicly in front of one’s social group. Our theoretical model identifies guilt from letting down the expectations of partners in a JL contract, and shame from falling short of normatively inadequate effort, under public repayment of loans, as the main psychological drivers of effort choice. Evidence from our lab-in-the-field experiment in Pakistan reveals large treatment effects and confirms the central roles of guilt and shame. Under private repayment, a JL contract increases effort by almost 100% relative to an IL contract. Under public repayment, effort levels are comparable under IL and JL contracts, which is consistent with recent empirical results. This indicates that shame-aversion plays a more important role as compared to guilt-aversion. Under IL, repayment in public relative to private repayment increases effort by 60%, confirming our shame-aversion hypothesis. Under JL, a comparison of private and public repayment shows that shame trumps guilt in explaining effort choices of borrowers. |
| Keywords: | microfinance, joint/individual liability, public/private repayment, belief-dependent motivations, guilt, shame, peer pressure, social capital, lab-in-the-field experiment |
| JEL: | C91 C92 D82 D91 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7773&r=all |
| By: | Schmitz, Patrick W. |
| Abstract: | In the Grossman-Hart-Moore property rights theory, there are no frictions ex post (i.e., after non-contractible investments have been sunk). In contrast, in transaction cost economics ex-post frictions play a central role. In this note, we bring the property rights theory closer to transaction cost economics by allowing for ex-post moral hazard. As a consequence, central conclusions of the Grossman-Hart-Moore theory may be overturned. In particular, even though only party A has to make an investment decision, B-ownership can yield higher investment incentives. Moreover, ownership matters even when investments are fully relationship-specific (i.e., when they have no impact on the parties' disagreement payoffs). |
| Keywords: | Incomplete Contracts; Investment incentives; moral hazard; Ownership rights; relationship specificity |
| JEL: | D23 D86 G34 L23 L24 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13841&r=all |
| By: | Schmitz, Patrick W. |
| Abstract: | The property rights approach to the theory of the firm is the most prominent application of the incomplete contracting paradigm. A central conclusion of the standard model says that joint ownership is suboptimal. In this note, we analyze a modified version of the standard model that is tailored to the organization of R&D activities, where one of the parties is wealth-constrained and protected by limited liability. It turns out that joint ownership can be optimal, since it avoids wasteful rent-seeking activities when limited liability rents are necessary to induce high effort. Our results are in line with the fact that R&D activities are often conducted in research joint ventures. |
| Keywords: | Incomplete Contracts; joint ownership; limited liability; Property rights; rent seeking |
| JEL: | D23 D86 L24 L25 O32 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13881&r=all |
| By: | Katrina Jessoe; Maya Papineau; David S. Rapson |
| Abstract: | This paper quantifies a tenant-side “split incentives” problem that exists when the largest commercial sector customers are on electricity-included property lease contracts causing them to face a marginal electricity price of zero. We use exogenous variation in weather shocks to show that the largest firms on tenant-paid contracts use up to 14 percent less electricity in response to summer temperature fluctuations. The result is retrieved under weaker identifying assumptions than previous split incentives papers, and is robust when exposed to several opportunities to fail. The electricity reduction in response to temperature increases is likely to be a lower bound when generalized nationwide and suggests that policymakers should consider a sub-metering policy to expose the largest commercial tenants to the prevailing retail electricity price. |
| Keywords: | electricity, principal-agent problem, split incentive, contracts |
| JEL: | D22 L14 Q51 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7734&r=all |
| By: | Michael Ewens; Alexander S. Gorbenko; Arthur Korteweg |
| Abstract: | We estimate the impact of venture capital (VC) contract terms on startup outcomes and the split of value between the entrepreneur and investor, accounting for endogenous selection via a novel dynamic search and matching model. The estimation uses a new, large data set of first financing rounds of startup companies. Consistent with efficient contracting theories, there is an optimal equity split between agents that maximizes the probability of success. However, VCs use their bargaining power to receive more investor-friendly terms compared to the contract that maximizes startup values. Better VCs still benefit the startup and the entrepreneur, due to their positive value creation. Counterfactual exercises show that eliminating certain contract terms benefits entrepreneurs and enables low-quality entrepreneurs to finance their startups more quickly, increasing the number of deals in the market. Lowering search frictions shifts the bargaining power to VCs and benefits them at the expense of entrepreneurs. The results show that selection of agents into deals is a first-order factor to take into account in studies of contracting. |
| JEL: | C78 D86 G24 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26115&r=all |
| By: | Senay Agca; Deniz O Igan; Fuhong Li; Prachi Mishra |
| Abstract: | Why do firms lobby? This paper exploits the unanticipated sequestration of federal budget accounts in March 2013 that reduced the availability of government funds disbursed through procurement contracts to shed light on this question. Following this event, firms with little or no prior exposure to the federal accounts that experienced cuts reduced their lobbying spending. In contrast, firms with a high degree of exposure to the cuts maintained and even increased their lobbying spending. This suggests that, when the same number of contractors competed for a piece of a reduced pie, the more affected firms likely intensified their lobbying efforts to distinguish themselves from the others and improve their chances of procuring a larger share of the smaller overall. These findings are stronger in government-dependent sectors and when there is intense competition. The evidence is more consistent with a rent-seeking explanation for lobbying. |
| Keywords: | National income accounts;National income accounting;Government expenditures;Industry;Trade policy;Political connections,lobbying,rent seeking,government spending,procurement,sequestration,post-event,industry concentration,full sample,federal contract |
| Date: | 2019–08–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/172&r=all |
| By: | Mariana Carrera; Heather Royer; Mark Stehr; Justin Sydnor; Dmitry Taubinsky |
| Abstract: | A large literature treats take-up of commitment contracts, in the form of choice-set restrictions or penalties, as a smoking gun for (awareness of) self-control problems. This paper provides new techniques for examining the validity of this assumption, as well as a new approach for detecting (awareness of) self-control problems. Theoretically, we show that with some uncertainty about the future, demand for commitment contracts is closer to a special case than to a robust implication of models of limited self-control. In a field experiment with 1292 members of a fitness facility, we find that many participants take up commitment contracts both for going to the gym more and for going to the gym less, and there is a significant positive correlation in demand for these two types of contracts. This suggests that commitment contract take-up reflects, at least in part, something other than the desire to change own future behavior, such as demand effects or "noisy valuation." Moreover, we find that commitment contract take-up is negatively related to awareness of self-control problems: a novel information treatment that increased awareness of self-control problems reduced demand for commitment contracts. We address the limitations of using commitment contracts as a measurement tool by showing that a combination of belief forecasts and willingness to pay for linear incentives provides more robust identification of limited self-control and people's awareness of it. We use the methodology to obtain some of the first parameter estimates of partially-sophisticated quasi-hyperbolic discounting in the field. |
| JEL: | C9 D9 I12 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26161&r=all |