nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2020‒06‒08
five papers chosen by
Guillem Roig
University of Melbourne

  1. Optimal contracts and supply-driven recessions By Giacomo Candian; Mikhail Dmitriev
  2. Self-Selection into Corruption: Evidence from the Lab By Pablo Brassiolo; Ricardo Estrada; Gustavo Fajardo; Juan F. Vargas
  3. Big G By Lydia Cox; Gernot J. Muller; Ernesto Pasten; Raphael Schoenle
  4. The Risk-Sharing problem under limited liability constraints in a single-period model By Jessica Martin
  5. “Conflict-performance assumption” or “performance-conflict assumption”: Insights from franchising By Rozenn Perrigot; Begona López-Fernández; Guy Basset

  1. By: Giacomo Candian (Department of Applied Economics, HEC Montréal); Mikhail Dmitriev (Department of Economics, Florida State University)
    Abstract: In models with financial frictions, state-contingent contracts stabilize the business cycle relative to contracts with predetermined rates. We show that this finding depends on whether predetermined rates are set in real or nominal terms. State-contingent contracts can amplify supply-driven recessions compared to contracts set in nominal terms.
    Keywords: collateral constraints, financial accelerator, financial frictions, optimal contracts
    JEL: C68 E44 E61
    Date: 2020–05
  2. By: Pablo Brassiolo; Ricardo Estrada; Gustavo Fajardo; Juan F. Vargas
    Abstract: We study whether opportunities to extract rents in a job affect the type of individuals who are attracted to it in terms of their underlying integrity. We do so in a laboratory experiment in which participants choose between two contracts that involve different tasks. We experimentally introduce the possibility of graft in one of them and study the sorting of subjects across contracts based on an incentivized measure of honesty. We find that the corruptible contract changes the composition of subjects because it attracts the most dishonest individuals and repels the most honest ones. In addition, we observe extensive graft when the opportunity is available. We introduce a double randomization strategy to disentangle the extent of which stealing responds to the aforementioned negative selection or to pure incentives (net of selection). We find that, in this setting, selection is the main driver of graft. Our results have clear policy implications to curb corruption.
    Keywords: Corruption, selection, rent extraction opportunities, personnel economics
    JEL: C91 D73 M5
    Date: 2020–05–28
  3. By: Lydia Cox; Gernot J. Muller; Ernesto Pasten; Raphael Schoenle
    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 in 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; Granularity; Sectoral Heterogeneity; Federal Procurement; Monetary Policy; Fiscal Policy Transmission
    JEL: E32 E62
    Date: 2020–05–27
  4. By: Jessica Martin (INSA Toulouse - Institut National des Sciences Appliquées - Toulouse - INSA - Institut National des Sciences Appliquées)
    Abstract: This work provides analysis of a variant of the Risk-Sharing Principal-Agent problem in a single period setting with additional constant lower and upper bounds on the wage paid to the Agent. First the effect of the extra constraints on optimal contract existence is analyzed and leads to conditions on utilities under which an optimum may be attained. Solution characterization is then provided along with the derivation of a Borch rule for Limited Liability. Finally the CARA utility case is considered and a closed form optimal wage and action are obtained. This allows for analysis of the classical CARA utility and gaussian setting.
    Date: 2020–05–07
  5. By: Rozenn Perrigot (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique); Begona López-Fernández (Facultad de Economía y Empresa - University of Oviedo); Guy Basset (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Franchising is an organizational governance form where relational and formal contracts complement each other and where franchisor and franchisees together may obtain better performance than working alone. Although relational contracts may adapt to changing environments, they are not as efficient in ambiguous settings. In franchised stores, liability for low performance is not always clear. Indeed, franchisor and franchisees work in close collaboration, and, therefore, this ambiguity on causes of low performance may lead to conflicts. The franchising literature, as far as we know, has addressed practitioners' concerns regarding performance on one side, and conflicts on the other side, but no study has exclusively focused on low performance and the emergence of conflicts. Our research contributes to the franchising literature by filling this relative gap and, contrary to "conflict-performance assumption" (Pearson, 1973; Duarte and Davies, 2003) held in the broader context of distribution channels, we consider low performance to be a cause, rather than a consequence, of franchisor/franchisee conflicts. This empirical study deals with franchising in France, the leading market in franchising in Europe and the third largest in the world. We used a qualitative approach based on 44 in-depth interviews with 27 franchisors and executives/high-level managers of franchise chains, as well as 17 franchisees from various industries to get a dual, and so more complete, assessment of franchising practitioners' views of performance-related conflicts. Our research findings show that franchisees, as independent small business owners, give priority to financial results compared to other goals and they are driven to continuously improve the performance of their store(s). When expectations are not met, franchisees sometimes blame franchisors because they are interdependent in their success and liability is not straightforward. As a collaborative team, franchisors and franchisees may benefit from minimizing conflicts and preventing them with the careful selection and management of franchisees that share franchisor's values and have internal locus of control.
    Keywords: Franchising Conflicts Performance Relational contracting Qualitative approach
    Date: 2020–07

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