nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2020‒02‒03
six papers chosen by
Guillem Roig
University of Melbourne

  1. Hidden Testing and Selective Disclosure of Evidence By Claudia Herresthal
  2. Systemic Risk in Networks with a Central Node By Hamed Amini; Damir Filipović; Andreea Minca
  3. Optimal contracts with randomly arriving tasks By Daniel Bird; Alexander Frug
  4. Heterogeneous effects of marketing contracts and resource-providing contracts on household income By Ruml, Anette; Ragasa, Catherine; Qaim, Matin
  5. Heterogeneous Effects of Temporary Employment on Productivity and Wages in the Italian Business Firms By Andrea Ricci
  6. Smallholder farmers’ dissatisfaction with contract schemes in spite of economic benefits: Issues of mistrust and lack of transparency By Ruml, Anette; Qaim, Matin

  1. By: Claudia Herresthal
    Abstract: An agent can sequentially run informative tests about an unknown state and disclose (some or all) outcomes to a decision maker who then faces an approval choice. Players agree on the optimal choice under certainty, but the decision maker has a higher approval threshold than the agent. I compare the case where testing is hidden and the agent chooses which test outcomes to verifiably disclose to the case where testing is observable. When testing is observable, I show that the agent may strategically stop testing even if further tests could yield a mutual benefit. I find conditions under which the decision maker is strictly better off under hidden testing and in some equilibria both players are strictly better off under hidden testing than in the unique equilibrium under observable testing.
    Keywords: endogenous information acquisition, verifiable disclosure, transparency, questionable research practices
    JEL: D83 D82
    Date: 2020–01
  2. By: Hamed Amini (J. Mack Robinson College of Business); Damir Filipović (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute); Andreea Minca (Cornell University)
    Abstract: We examine the effects on a financial network of clearing all contracts though a central node (CN) thereby transforming the original network into a star-shaped one. The CN is capitalized with external equity and a guaranty fund. We introduce a structural systemic risk measure that captures the shortfall of end users. We show that it is possible to simultaneously improve the expected surplus of the banks and the CN as well as decrease the shortfall of end users. We determine the CN's equity and guaranty fund policies as a Nash bargaining solution. We illustrate our findings on simulated Credit Default Swap networks compatible with aggregate market data.
    Keywords: Star-shaped Networks, Central Node, Market Design, Financial Network, Contagion, Systemic Risk, Credit Default Swap Markets
    JEL: C44 C54 C62 G01 G18 G32
    Date: 2020–01
  3. By: Daniel Bird; Alexander Frug
    Abstract: Workers rarely perform exactly the same tasks every day. Instead, their daily workload may change randomly over time to comply with the uctuating needs of the organiza- tion where they are employed. In this paper, we show that this typical randomness in workplaces has a striking e ect on the structure of long-term employment contracts. In particular, simple intertemporal variability in the worker's tasks is sucient to gen- erate a rich promotion-based dynamics in which, occasionally, the worker receives a (permanent) wage raise and his future work requirements are reduced.
    Keywords: Dynamic contracting, random tasks, seniority, promotion.
    JEL: D86 M51
    Date: 2020–01
  4. By: Ruml, Anette; Ragasa, Catherine; Qaim, Matin
    Abstract: In the existing literature, the effects of contract farming on household welfare were examined with mixed results. Most studies looked at single contract types. This paper contributes to the literature by comparing two types of contracts – simple marketing contracts and resource- providing contracts – in the Ghanaian oil palm sector. We investigate the effects of both contracts on farm income, as well as spillovers on other household income sources. We use survey data collected with an innovative sampling design and a control function approach to address possible issues of endogeneity. Both contracts lead to large positive effects on total household income in a similar magnitude, yet through quite different mechanisms. Farmers under the marketing contract use the increase in oil palm profits to transition out of agricultural production and into off-farm employment. Farmers under the resource-providing contract have a stronger dependency on income from oil palm, which is considerably more profitable under the contract. The findings underline that contract characteristics matter for the effects and that disaggregated analysis of different income sources is important to understand the underlying mechanisms.
    Keywords: Agricultural and Food Policy, Community/Rural/Urban Development, Farm Management, Risk and Uncertainty
    Date: 2020–01
  5. By: Andrea Ricci
    Abstract: What is the link between flexible employment, labour productivity and wages? Taking advantage of an original firm level database combining information from Rilevazione Imprese e Lavoro (RIL) conducted by INAPP on a representative sample of Italian firms with the AIDA archive, we explore the nexus between temporary employment, labour productivity and wages along the distributions of labour productivity and wages. By applying conditional quantile technique with additive fixed effects, we detect a strong negative relationship between the use of fixed-term contracts and both labour productivity and wages. The effect of temporary employment on firms’ labour productivity and wages is heterogeneous along the distributions. Low-productive firms - recurring more to temporary contracts - are also more affected by an incremental use of short-term work arrangements risking to be trapped in a vicious cycle of low-productivity and low-wages.
    Keywords: Labour productivity, Wages, Temporary employment, Firm-level analysis
    JEL: J2 J24 J31 L25
    Date: 2020–01
  6. By: Ruml, Anette; Qaim, Matin
    Abstract: Contract farming is typically seen as a useful mechanism to help smallholders. However, despite economic benefits, high dropout rates from contract schemes are commonplace. We use data from Ghana to show that smallholders benefit from a resource-providing contract in terms of higher yields and profits, but most of them still regret their decision to participate and would prefer to exit if they could. The main problem is insufficient information from the company. Farmers do not understand all contract details, which leads to mistrust. We argue that lack of transparency may explain high dropout rates in Ghana and other situations too.
    Keywords: Agribusiness, Agricultural and Food Policy, Community/Rural/Urban Development, Risk and Uncertainty
    Date: 2020–01

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