nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2019‒10‒28
three papers chosen by
Guillem Roig
University of Melbourne

  1. Electricity market competition when forward contracts are pairwise efficient By Van Moer, Geert
  2. What goes around, comes around: Reciprocal effects and double-sided moral hazard in the choice of brand licensing By E. Bacchiega; M. Colucci; M. Magnani
  3. Organizational Design with Portable Skills By Luca Picariello

  1. By: Van Moer, Geert
    Abstract: This paper investigates competition in electricity markets when each pair of strategic firms exchanges forward obligations pairwise-efficiently. The gains from pairwise trade are specific to the counterparty, which can be horizontally- or vertically-related depending on whether it has access to flexibility in the spot market. The analysis shows that pairwise efficient forward trade rules out a bilateral oligopoly spot market where net buyers and net sellers strategically interact. Firms without flexibility close their position entirely in the forward market. Forward markets serve to absorb renewable energy shocks, even if forward contracts are unobservable and firms are risk-neutral.
    Keywords: Nash-in-Nash bargaining; bilateral oligopoly; renewables
    JEL: D43 L13 L94
    Date: 2019–10–22
  2. By: E. Bacchiega; M. Colucci; M. Magnani
    Abstract: Extending a brand beyond its original product category is a major strategy for long-term profitability. A brand owner can internalize the development of the extension product, or license the brand to an external partner in order to exploit the licensee’s better capabilities and higher efficiency on the targeted market. Brand extension is characterized by the presence of the socalled reciprocal effect, whereby the effort exerted to develop and market the extension has a feedback effect – either positive or negative – on the value of the parent brand. Under licensing, this effect is an externality from the standpoint of the brand owner. The licensing relationship is characterized by double-sided moral hazard, requiring an incentivizing contract; the reciprocal effect adds a further element that should be governed by the contract. Indeed, a positive effect can boost the attractiveness of licensing relative to internal development, whereas a negative one can have the opposite effect. Drawing from extant literature, we build a game-theoretical model and show how reciprocal effect, (dis)similarity between the extension product and the parent brand, and (in)efficiency of the brand owner relative to the licensee in developing the extension shape the optimal licensing contract and affect the choice between internal development and licensing.
    JEL: L12 L24
    Date: 2019–10
  3. By: Luca Picariello (Università di Napoli Federico II and CSEF.)
    Abstract: Workers can move across firms and carry along portable human capital. I present a model where workers' talent is observable but task allocation is non-contractible. To reduce mobility firms may inefficiently match workers with tasks that reduce their outside option. I show that by organizing the firm as an equity-partnership, the efficient task allocation can be implemented and profits increase. This result is attained by shifting control rights to workers who become partners, decide over task allocation and earn dividends as compensation. This provides a new rationale for the widespread presence of firms organized as partnerships in human-capital intensive industries.
    Keywords: Task Allocation, Retention, Control Rights, Partnerships.
    JEL: D86 J24 J54 M52
    Date: 2019–10–22

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