nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2020‒01‒13
four papers chosen by
Guillem Roig
University of Melbourne

  1. The Simple Economics of White Elephants By Juan-José Ganuza; Gerard Llobet
  2. Agency Theory Meets Matching Theory By Inés Macho-Stadler; David Pérez-Castrillo
  3. Small is beautiful? How the introduction of mini futures contracts affects the regular contract By Greppmair, Stefan; Theissen, Erik
  4. Optimal insurance contract with benefits in kind under adverse selection By Cl\'emence Alasseur; Corinne Chaton; Emma Hubert

  1. By: Juan-José Ganuza; Gerard Llobet
    Abstract: This paper shows that the concession model discourages firms from acquiring information about the future profitability of a project. Uninformed contractors carry out good and bad projects because they are profitable in expected terms even though it would have been optimal to invest in screening them out according to their value. White elephants are identified as avoidable negative net present-value projects that are nevertheless undertaken. Institutional arrangements that limit the losses that firms can bear exacerbate this distortion. We characterize the optimal concession contract, which fosters the acquisition of information and achieves the first best by conditioning the duration of the concession to the realization of the demand and includes payments for not carrying out some projects.
    Keywords: concession contracts, Information acquisition, flexible-term concessions
    JEL: D82 D86 H21 L51
    Date: 2019–12
  2. By: Inés Macho-Stadler; David Pérez-Castrillo
    Abstract: The theory of incentives and matching theory can complement each other. In particular, matching theory can be a tool for analyzing optimal incentive contracts within a general equilibrium framework. We propose several models that study the endogenous payoffs of principals and agents as a function of the characteristics of all the market participants, as well as the joint attributes of the principal-agent pairs that partner in equilibrium. Moreover, considering each principal-agent relationship as part of a market may strongly influence our assessment of how the characteristics of the principal and the agent affect the optimal incentive contract. Finally, we discuss the effect of the existence of moral hazard on the nature of the matching between principals and agents that we may observe at equilibrium, compared to the matching that would happen if incentive concerns were absent.
    Keywords: Incentives, contracts, matching, moral hazard
    JEL: D86 D03 C78
    Date: 2020–01
  3. By: Greppmair, Stefan; Theissen, Erik
    Abstract: We analyze how the introduction of a mini futures contract affects the liquidity of the regular contract. We use a panel data set that covers more than 20 years and more than 20 contracts. We use a traditional difference-in-differences methodology as well as a synthetic control group approach (Abadie and Gardeazabal (2003), Abadie, Diamond and Hainmueller (2015)). We find that the liquidity of the regular contracts increases and the volatility decreases upon the introduction of a mini futures contract when the regular contract is traded electronically whereas the reverse is true when it is floor-traded. While total trading volume increases upon the introduction of the mini contract, the volume of the regular contracts does not change significantly. Overall, our results imply that the introduction of mini futures contracts is beneficial. They also confirm the superiority of electronic trading over floor-based trading.
    Keywords: Stock index futures,Mini futures,Liquidity,Market quality
    JEL: G10 G15
    Date: 2019
  4. By: Cl\'emence Alasseur; Corinne Chaton; Emma Hubert
    Abstract: A significant loss of income can have a negative impact on households who are forced to reduce their consumption of some particular staple goods. This can lead to health issues and consequently generates significant costs for society. In order to prevent these negative consequences, we suggest that consumers can buy an insurance to have a sufficient amount of staple good in case they lose a part of their income. We develop a two-period/two-good Principal-Agent problem with adverse selection and endogenous reservation utility to model an insurance with in kind benefits. This model allows us to obtain semi-explicit solutions for the insurance contract and is applied to the context of fuel poverty.
    Date: 2020–01

This nep-cta issue is ©2020 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.