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on Contract Theory and Applications |
| By: | Luca Rigotti |
| Abstract: | This paper studies a robust version of the classic surplus extraction problem, in which the designer knows only that the beliefs of each type belong to some set, and designs mechanisms that are suitable for all possible beliefs in that set. We derive necessary and sufficient conditions for full extraction in this setting, and show that these are natural set-valued analogues of the classic convex independence condition identified by Cremer and McLean (1985, 1988). We show that full extraction is neither generically possible nor generically impossible, in contrast to the standard setting in which full extraction is generic. When full extraction fails, we show that natural additional conditions can restrict both the nature of the contracts a designer can offer and the surplus the designer can obtain. |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:6902&r=all |
| By: | Nicolas Quérou (LAMETA - Laboratoire Montpelliérain d'Économie Théorique et Appliquée - CNRS - Centre National de la Recherche Scientifique - UM - Université de Montpellier - INRA - Institut National de la Recherche Agronomique - UM3 - Université Paul-Valéry - Montpellier 3 - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - UM1 - Université Montpellier 1 - Montpellier SupAgro - Centre international d'études supérieures en sciences agronomiques, CNRS - Centre National de la Recherche Scientifique); Antoine Soubeyran (Aix-Marseille School of Economics [Aix-Marseille Université] - Centre de la Vieille Charité [Aix-Marseille Université] - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique); Raphael Soubeyran (LAMETA - Laboratoire Montpelliérain d'Économie Théorique et Appliquée - CNRS - Centre National de la Recherche Scientifique - UM - Université de Montpellier - INRA - Institut National de la Recherche Agronomique - UM3 - Université Paul-Valéry - Montpellier 3 - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - UM1 - Université Montpellier 1 - Montpellier SupAgro - Centre international d'études supérieures en sciences agronomiques) |
| Abstract: | We consider a moral hazard problem where the agent has limited wealth which limits his possible actions. This may be due to different reasons: the opportunity cost can be monetary, the effort provided by the agent can actually be an investment, or the agent can invest in training activities in order to improve his capability. In such cases, the lower the level of wealth is, including transfer from or to the principal, the lower the maximum effort level that can be provided. The principal and the agent are risk neutral, so that limited wealth which limits possible actions is the distortion we consider compared to the standard model. We show then that the optimal contract is, in some cases, a sharing contract and the optimal up-front transfer is a payment from the principal to the agent. Moreover, whereas incentives and aid are substitutes in the case where the agent has sufficient wealth, they are complements when the agent has limited wealth. We also show that, if the agent can consume his wealth before the contract is signed, he gets all the surplus of the relationship. We discuss the implications of our findings in a variety of settings, including payments for ecosystem services, venture capital, and a current debate on wealth and cognitive functions. |
| Keywords: | aid,capability,incentives,moral hazard,wealth constraint,contract |
| Date: | 2020–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02795218&r=all |
| By: | Ngo van Long (Department of Economics - PUC - Pontifical Catholic University of Rio de Janeiro); Antoine Soubeyran (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales); Raphael Soubeyran (LAMETA - Laboratoire Montpelliérain d'Économie Théorique et Appliquée - CNRS - Centre National de la Recherche Scientifique - UM - Université de Montpellier - INRA - Institut National de la Recherche Agronomique - UM3 - Université Paul-Valéry - Montpellier 3 - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - UM1 - Université Montpellier 1 - Montpellier SupAgro - Centre international d'études supérieures en sciences agronomiques) |
| Abstract: | This paper explores the effect of a potential joint-venture breakup on the level of technology transfer in a set-up with exploration-exploitation trade-offs in the presence of time compression costs. We consider a joint-venture relationship between a technologically advanced multinational firm and a local firm operating in a developing economy where the ability to enforce contracts is weak, and the local firm can quit without penalties. The multinational firm has to consider the advantages and disadvantages of an intensive transfer of technology versus an extensive one. In response to the breakup incentives, the multinational firm reduces the intensity (lowering the pace)and opts for a more extensive transfer mode (longer duration of transfer), compared to the first best. The scheme is supported by a flow of side payments to encourage the local firm to stay longer. We show that a fall in time compression costs may increase or decrease the intensity of technology transfer, both in the first-best and in the second-best scenarios, depending on the nature of the saving in time-compression costs. |
| Keywords: | absorptive capacity,time-compression cost,breakup of relationship,technology transfer,joint venture |
| Date: | 2020–06–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02821055&r=all |
| By: | Luca Rigotti |
| Abstract: | We study surplus extraction in the general environment of McAfee and Reny (1992), and provide two alternative proofs of their main theorem. The first is an analogue of the classic argument of Cremer and McLean (1985, 1988), using geometric features of the set of agents’ beliefs to construct a menu of contracts extracting the desired surplus. This argument, which requires a finite state space, also leads to a counterexample showing that full extraction is not possible without further significant conditions on agents’ beliefs or surplus, even if the designer offers an infinite menu of contracts. The second argument uses duality and applies for an infinite state space, thus yielding the general result of McAfee and Reny (1992). Both arguments suggest methods for studying surplus extraction in settings beyond the standard model. |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:6903&r=all |
| By: | Iossa, Elisabetta; Loertscher, Simon; Marx, Leslie; Rey, Patrick |
| Abstract: | Collusive schemes by suppliers often take the form of allocating customers or markets among cartel members. We analyze incentives for suppliers to initiate and sustain such a collusive schemes in a repeated procurement setting. We show that, contrary to some prevailing beliefs, staggered (versus synchronized) purchasing does not make collusion more difficult to sustain or initiate. Buyer defensive measures include synchronized rather than staggered purchasing, first-price rather than second-price auctions, more aggressive or secrete reserve prices, longer contract lengths, withholding information, and avoiding observable registration procedures. Inefficiency induced by defensive measures is an often unrecognized social cost of collusive conduct. |
| Keywords: | Coordinated effects; sustainability and initiation of collusion; synchronized vs staggered purchasing |
| JEL: | D44 D82 L41 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14563&r=all |
| By: | Brassiolo, P; Estrada, R; Fajardo, G; Vargas, J. F |
| 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: | 2020–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:col:000092:018179&r=all |
| By: | Cox, Lydia; Müller, Gernot; Pasten, Ernesto; Schoenle, Raphael; Weber, Michael |
| 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: | federal procurement; fiscal policy transmission; government spending; granularity; monetary policy; sectoral heterogeneity |
| JEL: | E32 E62 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14625&r=all |