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on Contract Theory and Applications |
| By: | Daniel Danau; Annalisa Vinella |
| Abstract: | We consider a public-private partnership in an infrastructure project, which requires specialised expertise during the construction stage for the infrastructure to operationalise. This entails that, after an investment is made to begin building the infrastructure, its construction is completed at a cost, which increases with the investment at an increasing rate, and is higher if the government replaces the firm beforehand. The likelihood of a lower operating cost increases as well with the initial investment. Once the infrastructure is in place, the firm manages it, taking advantage of the (usual) synergy between construction and operation. Given the characteristics of the project, the firm has an incentive to either under-invest or over-invest in early construction, seeking a renegotiation thereafter. We show that, in a renegotiation-proof contract, the marginal cost of the investment facing the government is either above or below the marginal “technological” cost of the investment, at optimum. Accordingly, the resulting investment - although enhanced - is either below or above the efficient level. The contractual payoff of the firm is above its renegotiation payoff in the former case, below in the latter. We further show that when the firm holds private information on the operating conditions, the government may welcome a contractual renegotiation either as a way of containing (avoiding) the distortions due to the informational gap, or as a tool to pass the cost of construction completion onto the firm, or both. |
| Keywords: | public-private partnerships, asset specificity, hold-up, over/under-investment, renegotiation |
| JEL: | D82 H57 H81 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7885&r=all |
| By: | Swagata Bhattacharjee (Ashoka University) |
| Abstract: | Outsourcing of research is commonly observed in knowledge-intensive industries e.g. biotech. We model innovation as an ambiguous stochastic process, and assume that the commercial firms are more ambiguity averse than the research labs. We characterize the optimal sequence of short-term contracts governing innovation, and show how it facilitates ambiguity sharing. The firm's ambiguity aversion mitigates the dynamic moral hazard problem, resulting in monotonically decreasing investment and prevents equilibrium delay. However, compared to an ambiguity-neutral policymaker's benchmark, the research alliance stops experimenting earlier, and may liquidate the project even after being patented; even redesigning patent laws cannot solve both of the problems. |
| Keywords: | Ambiguity, Dynamic Contract, Patent law, Innovation, R&D |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:ash:wpaper:15&r=all |
| By: | Lars Hornuf; Tobias Schilling; Armin Schwienbacher |
| Abstract: | It is often assumed that entrepreneurs retain more control of their venture when they opt for equity crowdfunding as compared to venture capital, notably because crowd investors are passive. We study whether crowd investors are indeed passive by analysing the cash flow and control rights crowd investors receive in equity crowdfunding in Germany, where more flexible contracts are offered than in many other countries. We document that in Germany many of the rights used in venture capital investment contracts are also used in equity crowdfunding contracts. We find that crowd investors are asked to pay higher prices if they receive more cash flow and exit rights, consistent with the fact that these rights are valuable to the crowd. However, these rights have no meaningful economic impact, since they do not affect campaign outcome, the likelihood of securing follow-on funding, nor the likelihood of liquidation of the venture. These results are inconsistent with control rights theory that predicts positive impacts, in contrast to results documented for venture capital contracts. Rather, our results suggest that crowd investors are passive investors whose control rights are ineffective or not exercised. |
| Keywords: | crowdfunding, crowdinvesting, financial contracting, venture capital |
| JEL: | G34 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7884&r=all |
| By: | Kevin Lang; Kaiwen Leong; Huailu Li; Haibo Xu |
| Abstract: | We study roughly 11,000 loans from unlicensed moneylenders to over 1,000 borrowers in Singapore and provide basic information about this understudied market. Borrowers frequently expect to repay late. While lenders do rely on additional punishments to enforce loans, the primary cost of not repaying on time is compounding of a very high interest rate. We develop a very simple model of the relational contract between loan sharks and borrowers and use it to predict the effect of a crackdown on illegal moneylending. Consistent with our model, the crackdown raised the interest rate and lowered the size of loans. |
| JEL: | I28 I3 K42 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26400&r=all |
| By: | Spagnolo, Giancarlo (Stockholm Institute of Transition Economics); Barbosa, Kleno (Stockholm Institute of Transition Economics) |
| Abstract: | This paper provides an overview of the corruption case and the connected cartels that affected one of the biggest Brazilian state-owned companies, Petrobras, and the highly controversial ‘Operation Car Wash’. We focus on the behavior of cartel members and study the size of the contracts affected or potentially affected by the illegal activity, comparing them with comparable sets of contracts selected with three different matching approaches. |
| Keywords: | Corruption; Cartels; Brazil |
| JEL: | F19 |
| Date: | 2019–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hasite:0051&r=all |
| By: | Julio Backhoff-Veraguas; Patrick Beissner; Ulrich Horst |
| Abstract: | We consider a general framework of optimal mechanism design under adverse selection and ambiguity about the type distribution of agents. We prove the existence of optimal mechanisms under minimal assumptions on the contract space and prove that centralized contracting implemented via mechanisms is equivalent to delegated contracting implemented via a contract menu under these assumptions. Our abstract existence results are applied to a series of applications that include models of optimal risk sharing and of optimal portfolio delegation. |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1910.12516&r=all |
| By: | Pagnozzi, Marco; Piccolo, Salvatore; Reisinger, Markus |
| JEL: | D43 L11 L42 L81 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc19:203651&r=all |