nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2019‒10‒07
three papers chosen by
Guillem Roig
University of Melbourne

  1. Specific Capital, Firm Insurance, and the Dynamics of the Postgraduate Wage Premium By Gu, Ran
  2. Interest Rate Risk, Term Spreads, and the Mortgage Contract Term By Bertram Steininger; Melanie Sturm
  3. Optimal Contracts for Renewable Electricity By Sarah Parlane; L. (Lisa B.) Ryan

  1. By: Gu, Ran
    Abstract: Postgraduate degree holders experience lower cyclical wage variation than those with undergraduate degrees. Moreover, postgraduates have more specific human capital than undergraduates. Using an equilibrium search model with long-term contracts and imperfect monitoring of worker effort, this paper attributes the cyclicality of the postgraduate-undergraduate wage gap to the differences in specific capital. Imperfect monitoring creates a moral hazard problem that requires firms to pay efficiency wages. More specific capital leads to lower mobility, thereby alleviating the moral hazard and improving risk-sharing. Estimates reveal that specific capital explains the differences both in labour turnover and in wage cyclicality across education groups.
    Keywords: specific human capital, postgraduate, wage premium, wage cyclicality, long-term contracts
    JEL: E24 E32 I24 J31 J64
    Date: 2019–09–02
  2. By: Bertram Steininger; Melanie Sturm
    Abstract: Borrowers of a mortgage can choose between fully bearing the interest rate chance risk and paying a term spread to be protected against fluctuating mortgage rates. By using a one-period model, we study the choice between a fully adjustable mortgage and a fully fixed-rate mortgage. Furthermore, we examine with a life cycle model whether a mortgage is best broken down into several short-to-medium-term FRMs -- a common form in various mortgage markets but only rarely analyzed in research. We are among the first to demonstrate that borrowers with high risk aversion, non-amortizing mortgages, a large mortgage, and a low probability of moving are better off with long-term contracts. Our results show that amortizing mortgages are best broken down into several contracts with the optimal contract term generally declining as the mortgage ages. Initial contracts may be shorter than following contracts, only if borrowers expect to benefit from decreasing interest rates. For non-amortizing mortgages, a fully FRM is superior, unless interest rates are expected to decrease significantly.
    Keywords: Interest Rate Risk; Mortgage Contract Term; Term Spread; Yield Curve
    JEL: R3
    Date: 2019–01–01
  3. By: Sarah Parlane; L. (Lisa B.) Ryan
    Abstract: Companies are increasingly choosing to procure their power from renewable energy sources, with their own set of potential challenges. In this paper we focus on contracts to procure electricity from renewable sources that are inherently unreliable (such as wind and solar). We determine the contracts that minimize the cost of procuring a given amount of renewable energy from two risk-averse generators. We contrast outcomes arising when investments are set in centralised and decentralised settings, with the absence of reliability addressed by either issuing orders in excess of what is needed or by investing in improved reliability. Our results suggest that future contracts may be geared towards a greater reliance on order inflation and lower investments in reliability as the cost of renewable energy keeps falling. The implications of these results for grid congestion and electricity spot market prices should be of interest to regulators and transmission system operators.
    Keywords: Renewable electricity contracts; Power purchase agreements; Newsvendor model; Risk aversion; Order inflation; Moral hazard
    JEL: D81 D86 L14 L24 L94 Q21
    Date: 2019–09

This nep-cta issue is ©2019 by Guillem Roig. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.