nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2020‒05‒11
eight papers chosen by
Guillem Roig
University of Melbourne

  1. Exclusionary contracts and incentives to innovate By Ulsaker, Simen A.
  2. Time-Consistent Carbon Pricing: The Role of Carbon Contracts for Differences By Olga Chiappinelli; Karsten Neuhoff
  3. Bilateral Information Disclosure in Adverse Selection Markets with Nonexclusive Competition By Joseph E. Stiglitz; Jungyoll Yun; Andrew Kosenko
  4. On the Existence of Positive Equilibrium Profits in Competitive Screening Markets By Yehuda John Levy; Andre Veiga
  5. Multimarket Contact and Collusion in Online Retail By Poppius, Hampus
  6. Big G By Lydia Cox; Gernot Müller; Ernesto Pasten; Raphael S. Schoenle; Michael Weber; Michael Weber
  7. "Introducing and enhancing competition to improve solid waste management in Barcelona" By Germà Bel; Marianna Sebo
  8. Managing Global Production: Theory and Evidence from Just-in-Time Supply Chains By Pisch, Frank

  1. By: Ulsaker, Simen A. (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: The article considers a situation where several firms have the opportunity to sell an identical product to a set of buyers, and where each seller can invest in R&D to develop a higher quality version of the product in question. I consider the possibility of allowing the sellers to offer exclusionary contracts, prior to deciding how much to invest in R&D. In equilibrium every buyer will sign an exclusionary contract with the same seller. Since all buyers are locked to one seller, only this seller will have an incentive to invest in R&D. Whether or not banning exclusionary contracts increases the aggregate probability of successful innovation depends on the R&D technology. More specifically, banning exclusionary contracts will increase the aggregate probability of innovation and joint surplus of buyers and sellers only when the R&D technology exhibits sufficient diseconomies of scale.
    Keywords: Vertical relations; Exclusive contracts; Innovation
    JEL: L22 L42
    Date: 2020–04–27
  2. By: Olga Chiappinelli; Karsten Neuhoff
    Abstract: Carbon pricing decisions by governments are prone to time-inconsistency, which causes the private sector to underinvest in emission-reducing technologies. We show that incentives for decarbonization can be improved if complementing carbon pricing with carbon contracts for differences, where the government commits to pay a fixed carbon price level to the investors. We derive conditions under which the government is willing to “tie its hands” with the contracts.
    Keywords: Carbon pricing, time-inconsistency, green technology, climate policy, carbon contracts
    JEL: C73 L51 O31 Q58
    Date: 2020
  3. By: Joseph E. Stiglitz; Jungyoll Yun; Andrew Kosenko
    Abstract: We study insurance markets with nonexclusive contracts, introducing bilateral endogenous information disclosure about insurance sales and purchases by firms and consumers. We show that a competitive equilibrium exists under remarkably mild conditions, and characterize the unique equilibrium outcome. With two types of consumers the outcome consists of a pooling contract which maximizes the well-being of the low risk type (along the zero profit pooling line) plus a supplemental (undisclosed and nonexclusive) contract that brings the high risk type to full insurance (at his own odds). We show that this outcome is extremely robust and constrained Pareto efficient. Consumer disclosure and asymmetric equilibrium information flows are critical in supporting the equilibrium.
    JEL: D43 D82 D86
    Date: 2020–04
  4. By: Yehuda John Levy; Andre Veiga
    Abstract: We assume a fixed number of symmetric firms, competition in prices, constant returns to scale and frictionless consumer choices. Consumers differ in their preferences and profitability (e.g., due to heterogeneous risk aversion and loss probabilities), which creates adverse selection. Firms can offer multiple contracts to screen individuals, in equilibrium and in any deviation. We show that equilibrium profits vanish if each consumer has a unique optimizing bundle at equilibrium prices or, more generally, if there exists a linear ordering over of contracts that dictates the preferences of firms whenever consumers are indifferent between multiple optimal contracts. For instance, equilibrium profits vanish if the marginal rate of substitution of quality for price is sharper for profit than for utility. In particular, profit also vanishes if utility equals the sum of (negative) profit, and a surplus (eg, due to risk aversion). We provide examples of economies where there exists an equilibrium with strictly positive profit and show that these examples are robust (hold for an open set of economies).
    Keywords: Perfect Competition, Equilibrium, Screening
    JEL: D41 C62 D82 G22
    Date: 2020–01
  5. By: Poppius, Hampus (Department of Economics, Lund University)
    Abstract: When firms meet in multiple markets, they can leverage punishment ability in one market to sustain collusion in another. This is the first paper to test this theory for multiproduct retailers that sell consumer goods online. With data on the universe of consumer goods sold online in Sweden, I estimate that multimarket contact increases prices. To more closely investigate what drives the effect, I employ a machine-learning method to estimate effect heterogeneity. The main finding is that multimarket contact increases prices to a higher extent if there are fewer firms participating in the contact markets, which is one of the theoretical predictions. Previous studies focus on geographical markets, where firms provide a good or service in different locations. I instead define markets as different product markets, where each market is defined by the type of good. This is the first paper to study multimarket contact and collusion with this type of market definition. The effect is stronger than in previously studied settings.
    Keywords: Tacit collusion; pricing; e-commerce; causal machine learning
    JEL: D22 D43 L41 L81
    Date: 2020–04–08
  6. By: Lydia Cox; Gernot Müller; Ernesto Pasten; Raphael S. Schoenle; Michael Weber; Michael Weber
    Abstract: “Big G” typically refers to aggregate government spending on a homogeneous good. In this paper, we open up this construct by analyzing the entire universe of procurement contracts of the US government and establish five facts. First, government spending is granular, that is, it is concentrated in relatively few firms and sectors. Second, relative to private expenditures its composition is biased. Third, procurement contracts are short-lived. Fourth, idiosyncratic variation dominates the fluctuation of spending. Last, government spending is concentrated in sectors with relatively sticky prices. Accounting for these facts within a stylized New Keynesian model offers new insights into the fiscal transmission mechanism: fiscal shocks hardly impact inflation, little crowding out of private expenditure exists, and the multiplier tends to be larger compared to a one-sector benchmark aligning the model with the empirical evidence.
    Keywords: government spending, federal procurement, granularity, sectoral heterogeneity, fiscal policy transmission, monetary policy
    JEL: E62 E32
    Date: 2020
  7. By: Germà Bel (Department of Econometrics, Statistics and Applied Economics. John Keynes 1-11. 08034 Barcelona, Spain); Marianna Sebo (Department of Econometrics, Statistics and Applied Economics. John Keynes 1-11. 08034 Barcelona, Spain.)
    Abstract: Over the last two decades, Barcelona has implemented a far-reaching reform of the city’s solid waste management. In 2000, the city was divided in four zones, with four separate solid waste collection contracts being awarded to private firms, with none being allowed to obtain more than two zones, a rule that was revised in 2009 to just one contract per firm. This division of the market via exclusive territories sought to enhance competition in the expectation of the convergence of relative costs, efficiency and service quality throughout the city. Based on monthly observations of costs and outputs between 2015 and 2018, this paper analyzes and evaluates the creation of lots as a tool of competition. We find that firms producing in larger zones report higher costs, that increased competition was not sufficient to lead to converging costs, and that none of the firms operate under increasing returns to scale. As such, we recommend creating an additional zone. We further suggest that if one of the zones were to be subject to public production, and adopted a mixed delivery provision strategy, the ability of the regulator to deal with asymmetric information would improve and a more reliable system could be created.
    Keywords: Waste collection, Management, Privatization, Re-municipalization, Competition JEL classification: L32, L33, L38, Q53
    Date: 2020–04
  8. By: Pisch, Frank
    Abstract: This paper examines the structure of international Just-in-Time (JIT) supply chains. Using information about JIT supply chain management for a large panel of French manufacturers I first document that JIT is widespread across all industries and accounts for roughly two thirds of aggregate employment and trade. Next, I establish two novel stylized facts about the structure of JIT supply chains: They are more concentrated in space (1) and more vertically integrated both domestically and internationally (2), than their `traditional' counterparts. I rationalize these patterns in a framework of sequential production where failure to coordinate adaptation decisions in the presence of upstream and demand shocks leads to inventory holding. In JIT supply chains, information about downstream demand conditions is shared throughout the supply chain, which facilitates coordination. The associated inventory saving effect is stronger when firms are close to each other, so that the supply chain reacts quickly to changes in demand; and when they are part of the same company, so that incentives for adaptation are aligned. Guided by further predictions of the model, I present empirical evidence that these organizational complementarities depend on inventory holding costs, demand persistence, and the ability to push inventories upstream via contractual penalties. Finally, I discuss long term implications of Brexit and COVID-19 for the structure of international supply chains based on my findings.
    Keywords: Price setting behavior of firms, exchange rate, distance to border
    JEL: F10 F14 F23 D23 L23
    Date: 2020–04

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