nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2019‒09‒16
six papers chosen by
Guillem Roig
University of Melbourne

  1. Rigid wages and contracts: Time- versus state-dependent wages in the Netherlands By Grajales-Olarte, Anderson; Uras, Burak R.; Vellekoop, Nathanael
  2. Markets With Memory: Dynamic Channel Optimization Models With Price-Dependent Stochastic Demand By Azad Gholami, Reza; Sandal, Leif K.; Ubøe, Jan
  3. Solution Algorithms for Optimal Buy-Back Contracts in Multi-period Channel Equilibria with Stochastic Demand and Delayed Information By Azad Gholami, Reza; Sandal, Leif K.; Ubøe, Jan
  4. On the competitive effects of screening in procurement By Adam Pigoñ; Gyula Seres
  5. General Competing Mechanisms with Frictions By Seungjin Han
  6. Multiple Applications, Competing Mechanisms, and Market Power By James Albrecht; Xiaoming Cai; Pieter A. Gautier; Susan Vroman

  1. By: Grajales-Olarte, Anderson; Uras, Burak R.; Vellekoop, Nathanael
    Abstract: We study nominal wage rigidity in the Netherlands using administrative data, which has three key features: (1) high-frequency (monthly), (2) high-quality (administrative records), and (3) high coverage (the universe of workers and the universe of firms). We find wage rigidity patterns in the data that are similar to wage behavior documented for other European countries. In particular we find that the hazard function has two spikes, one at 12 months and another one at 24 months and wage changes have time and state dependency components. As a novel and important piece of evidence we also uncover substantial heterogeneity in the frequency of wage changes due to explicit terms of the labor contract. In particular, contracts featuring flexible hours, such as on-call contracts, exhibit a higher probability of a change in the contract wage compared to fixed hour contracts. Once we split the sample based on contract characteristics, we also find that the response of wage changes to the time and state component is heterogeneous across different type of contracts - with relatively more downward adjustments in flexible-hour contract wages in response to aggregate unemployment.
    Keywords: wage rigidity,flexible-hour contracts,microdata,state dependency,time dependency
    JEL: E24 J31
    Date: 2019
  2. By: Azad Gholami, Reza (Dept. of Business and Management Science, Norwegian School of Economics); Sandal, Leif K. (Dept. of Business and Management Science, Norwegian School of Economics); Ubøe, Jan (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: Almost every vendor faces uncertain and time-varying demand. Inventory level and price optimization while catering to stochastic demand are conventionally formulated as variants of newsvendor problem. Despite its ubiquity in potential applications, the time-dependent (multi-period) newsvendor problem in its general form has received limited attention in the literature due to its complexity and the highly nested structure of its ensuing optimization problems. The complexity level rises even more when there are more than one decision maker in a supply channel, trying to reach an equilibrium. The purpose of this paper is to construct an explicit and e cient solution procedure for multi-period price-setting newsvendor problems in a Stackelberg framework. In particular, we show that our recursive solution algorithm can be applied to standard contracts such as buy back contracts, revenue sharing contracts, and their generalizations.
    Keywords: Stochastic demand; time-dependent demand; price-dependent demand; memory functions; market engineering; demand manipulation; prescriptive analytics; pricing theory
    JEL: C61 C73 D81
    Date: 2019–09–09
  3. By: Azad Gholami, Reza (Dept. of Business and Management Science, Norwegian School of Economics); Sandal, Leif K. (Dept. of Business and Management Science, Norwegian School of Economics); Ubøe, Jan (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: We analyze the problem of time-dependent channel coordination in the face of uncertain demand. The channel, composed of a manufacturer and a retailer, is to address a time-varying and uncertain price-dependent demand. The decision variables of the manufacturer are wholesale and (possibly zero) buy-back prices, and those of the retailer are order quantity and retail price. Moreover, at each period, the retailer is allowed to postpone her retail price until demand uncertainty is resolved. In order to place emphasis on the price-decadent nature of demand, we embed a class of memory effects in demand structure, such that current demand at each period demand is affected by pricing history as well as current price. The ensuing equilibria problems, thus, become highly nested in time. We then propose our memory-based solution algorithm which coordinates the channel with optimal buy-back contracts at each period. We show that, contrary to the conventional belief, too generous buy-back prices may not only be suboptimal to the manufacturer, but also decrease the expected profit for the retailer and thus for the whole channel.
    Keywords: Stochastic optimization; bilevel programming; game theory; channel coordination; buy-back contracts; price postponement; pricing theory; contract theory
    JEL: C61 C73 D81
    Date: 2019–09–09
  4. By: Adam Pigoñ; Gyula Seres
    Abstract: Procuring authorities frequently use screening in order to mitigate risky bids. This study estimates the effect of bid screening and litigation on entry and bidding using a unique data set on highway construction procurement auctions in Poland. The market exhibits a screening method that ex post selects eligible offers. We demonstrate with an empirical model that this method disproportionately affects small firms and creates a barrier to entry. Our results suggest that screening increases bids by two channels. First, it directly inates bids as well as decreasing entry. Second, in a competitive market, lower entry also inates bids and prices.
    Keywords: Procurement, Auctions, Market Design, Litigation
    JEL: H57 D44 L5
    Date: 2019–08
  5. By: Seungjin Han
    Abstract: This paper studies the class of robust equilibria in a general competing mechanism game for decentralized markets with frictions in which non-deviating sellers punish a deviator with dominant strategy incentive compatible (DIC) direct mechanisms. Given one-dimensional, independent, and private types, the lower bound of a seller's payoff in such equilibria is his minmax value over all DIC direct mechanisms if a seller can deviate to a contract that determines a menu of any complex mechanisms conditional on buyers' messages and he chooses a mechanism he wants from it. In applications, the number of sellers is endogenized given a number of buyers and fixed entry costs. As the number of buyer increases, a unique equilibrium emerges and the equilibrium ratio of buyers to sellers converges to the point where a seller's net profit is zero with the monopoly terms of trade.
    Keywords: competing mechanisms, dominant strategy incentive compatibility, frictions, implicit collusion
    JEL: C72 D82
    Date: 2019–09
  6. By: James Albrecht; Xiaoming Cai; Pieter A. Gautier; Susan Vroman
    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

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