nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2020‒03‒16
three papers chosen by
Guillem Roig
University of Melbourne

  1. Race Meets Bargaining in Product Development By Emin Karagözoglu; Kerim Keskin; Cagri Saglam
  2. Microfounded Contest Design By René Kirkegaard

  1. By: Emin Karagözoglu; Kerim Keskin; Cagri Saglam
    Abstract: We introduce a model of product development in a firm. Our model describes the process as a multi-stage contest (i.e., race) with an endogenous length (with one stage or two stages) between two workers. We model the payments to workers from the new product using the normatively appealing Nash bargaining solution (see Nash, 1950). In our model the disagreement payoffs endogenously depend on the contest outcome. More precisely, a bargaining advantage is given to the leading worker in the product development contest. We analytically characterize subgame perfect equilibrium effort levels of workers and describe the conditions under which a full-edged final (as opposed to, say, a prototype) product is developed. Our comparative static analyses reveal economically intuitive insights. Finally, we provide an answer to the firm’s problem of optimal incentive provision (considering both collective and individual incentives).
    Keywords: product development, contests, Nash bargaining solution, optimal contracts, subgame perfect Nash equilibrium, race
    JEL: C72 C78 D86 O31 O32
    Date: 2020
  2. By: René Kirkegaard (Department of Economics and Finance, University of Guelph, Guelph ON Canada)
    Abstract: This paper examines a unifying model of contests that distinguishes between unobservable actions and observable but noisy performance. Special versions of the model have been used to provide microfoundations for the popular generalized lottery contest success function. However, extensions to contests with exogenous or endogenous biases have strayed from the microfoundations. Consequently, biases and design instruments have been modelled in ad hoc and poorly founded ways. Here, starting directly from the stochastic-performance foundation, internally consistent and fully optimal contests are derived from first principles. The problem resembles a contracting problem. The optimally designed contest is not a generalized lottery contest.
    Keywords: Contest design; Generalized lottery contests; Stochastic performance contests; Team moral hazard; Tournaments; Tullock contests.
    JEL: C72 D72
    Date: 2020
  3. By: Francesco Crespi; Serenella Caravella
    Abstract: The study focuses on the impact exerted on private R&D expenditures by regular and innovative public procurement when taken in combination or insolation with supply-push measures. The econometric analysis relies on a pulled sample of 4,206 Italian manufacturing firms observed between 2010-2014. The empirical exercise confirms previous evidences on the relevance of technology-push instruments in sustaining firms’ innovativeness. On the contrary, the ability of public procurement activities in shaping innovative investments is found to depend on a number of instances related to: i) the adoption of contemporaneous supply side measures; ii) the inclusion of innovative demand in procurement contracts. The analysis provides important suggestions with respect to the potential effectiveness of demand-side tools when implemented in weak administrative and innovation systems, as in the Italian case. Moreover, it is shown that the design of the policy mix matters, and its effectiveness improves when demand-side and supply-side instruments are jointly implemented.
    Keywords: Demand-pull policies, Public Procurement, Policy-mix, Non-parametric analysis.
    JEL: H57 O25 O38
    Date: 2020–02

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