nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2019‒11‒25
five papers chosen by
Guillem Roig
University of Melbourne

  1. Rulebooks in Relational Contracts By Li, Jin; Mukherjee, Arijit; Vasconcelos, Luis
  2. Waiting for the Prince Charming: Fixed-Term Contracts as Stopgaps By Normann Rion
  3. Superstars in two-sided markets: exclusives or not? By Leonardo Madio; Carroni, Elias; Shekhar, Shiva
  4. Managing performance evaluation systems: Relational incentives in the presence of learning-by-shirking By Li, Jin; Mukherjee, Arijit; Vasconcelos, Luis
  5. Nonlinear reserving and multiple contract modifications in life insurance By Marcus C. Christiansen; Boualem Djehiche

  1. By: Li, Jin (Business and Economics, The University of Hong Kong, K.K.); Mukherjee, Arijit (Michigan State University, Department of Economics); Vasconcelos, Luis (Department of Economics, University of Essex)
    Abstract: Firms can accrue large benefits by fostering worker initiative, but standardized work rules are still widely used. We present a model of relational incentives where the use of rules fluctuates over time as the firm faces shocks to its credibility. Worker initiative in adapting to local information can ensure production efficiency but also requires strong incentives. As shocks weaken relational incentives, the firm may adopt rules that yield satisfactory (though suboptimal) performance. Rules help the relationship survive the shocks, but the relationship becomes less efficient in the future. While the relationship may recover, its ability to weather future shocks deteriorates.
    Keywords: Relational contracts; standardization; rules; employee initiative
    JEL: D82 L23 M12
    Date: 2019–08–26
  2. By: Normann Rion (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In this paper, I build a simple Mortensen-Pissarides model embedding a dual labor market. I derive conditions for the existence of an equilibrium with coexisting strongly protected open-ended contracts and exogeneously short fixed-term contracts. I also study dynamics after a reform on employment protection legislation. Temporary contracts play the role of fillers while permanent contracts are used to lock up high-productivity matches. High firing costs favor the emergence of a dual equilibrium. Employment protection legislation encourages the resort to temporary employment in job creation. This scheme is intertwined with a general-equilibrium e_ect: permanent contracts represent the bulk of employed workers and a more stringent employment protection reduces aggregate job destruction. This pushes down unemployment and in turn reduces job creation ows through temporary contracts. The model is calibrated to match the French labor market. Policy experiments demonstrate that there is no joint gain in employment and social welfare through reforms on firing costs around the baseline economy. The optimal policy consists in implementing a unique open-ended contract with a strong cut in firing costs. Increases in firing costs within a dual labor market lead to a sluggish adjustment, while large cuts in firing costs lead to a quick one. The adjustment time of the labor market is highly non-monotonous between these two extremes. Policy-related uncertainty significantly strengthens fixed-term employment on behalf of open-ended employment. Considering extensions, I draw conclusions on the inability of a large class of random-matching models to mimic the distribution of temporary contracts' duration while maintaining possible the expiring temporary contracts' conversion into permanent contracts.
    Keywords: Fixed-term Contracts,Unemployment,Employment Protection,Policy,Dynamics
    Date: 2019–10
  3. By: Leonardo Madio; Carroni, Elias; Shekhar, Shiva
    Abstract: This article studies incentives for a premium provider (Superstar) to offer exclusive contracts to competing platforms mediating the interactions between consumers and firms. When platform competition is intense, more consumers affiliate with the platform favored by Superstar exclusivity. This mechanism is self-reinforcing as firms follow consumer decisions and some join the favored platform only. Exclusivity always benefits firms and might eventually benefit consumers. A vertical merger (platform-Superstar) makes non-exclusivity more likely than if the Superstar was independent. The analysis provides novel insights for managers and policymakers and it is robust to several variations and extensions.
    JEL: L13 L22 L86 K21
    Date: 2019–10–10
  4. By: Li, Jin (Department of Management, London School of Economics); Mukherjee, Arijit (Michigan State University, Department of Economics); Vasconcelos, Luis (Department of Economics, University of Essex)
    Abstract: An agent may privately learn which aspects of his responsibilities are more important by shirking on some of them and use that information in the future to shirk more effectively. In a model of long-term employment relationship, we characterize the optimal relational contract in the presence of such learning-by-shirking, and highlight how the performance measurement system can be managed to sharpen incentives. Two related policies are studied: intermittent replacement of existing measures, and adoption of new ones. In spite of the learning-by-shirking effect, the optimal contract is stationary and may involve stochastic replacement/adoption policies in order to dilute the agent's information rents from shirking.
    Keywords: Relational contracts; performance metrics; gaming; learning-by-shirking
    JEL: D82 L23 M52
    Date: 2019–08–26
  5. By: Marcus C. Christiansen; Boualem Djehiche
    Abstract: Insurance cash flows become reserve dependent whenever contract conditions are modified during the contract term while maintaining actuarial equivalence. As a result, insurance cash flows and prospective reserves depend on each other in a circular way, and it is a non-trivial problem to solve that circularity and make cash flows and reserves well-defined. The literature offers answers to that question in case of one or two contract modifications under Markovian assumptions. This paper studies multiple contract modifications in a general non-Markovian framework.
    Date: 2019–11

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