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on Contract Theory and Applications |
| By: | Michael R. Roberts; Michael Schwert |
| Abstract: | We show that variation in short-term nominal interest rates produces an endogenous response in the design of and commitment to corporate loan contracts. Interest rates are negatively related to the cash flow rights and positively related to the control rights granted to creditors. An implication of this contractual response is a sharp increase in the ex post renegotiation of contracts originated in low interest rate environments, as well as a muted effect of interest rate variation on the cost of debt capital. Our findings illustrate how the design of financial contracts in practice reflects a multi-dimensional tradeoff among contract features that aligns incentives and apportions risk among the contracting parties in a state-contingent manner. |
| JEL: | E44 G21 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27195&r=all |
| By: | Boehm, Johannes; Oberfield, Ezra |
| Abstract: | The strength of contract enforcement determines how firms source inputs and organize production. Using microdata on Indian manufacturing plants, we show that production and sourcing decisions appear systematically distorted in states with weaker enforcement. Specifically, we document that in industries that tend to rely more heavily on relationship-specific intermediate inputs, plants in states with more congested courts shift their expenditures away from intermediate inputs and have a greater vertical span of production. To quantify the impact of these distortions on aggregate productivity, we construct a model in which plants have several ways of producing, each with different bundles of inputs. Weak enforcement exacerbates a holdup problem that arises when using inputs that require customization, distorting both the intensive and extensive margins of input use. The equilibrium organization of production and the network structure of input-output linkages arise endogenously from the producers' simultaneous cost minimization decisions. We identify the structural parameters that govern enforcement frictions from cross-state variation in the first moments of producers' cost shares. A set of counterfactuals show that enforcement frictions lower aggregate productivity to an extent that is relevant on the macro scale. |
| JEL: | E32 F12 O11 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14482&r=all |
| By: | Lang, Kevin (Boston University); Leong, Kaiwen (Nanyang Technological University, Singapore); Li, Huailu (Fudan University, China); Xu, Haibo (Tongji University) |
| Abstract: | We study roughly 11,000 loans from unlicensed moneylenders to over 1,000 borrowers in Singapore and provide basic information about this understudied market. Borrowers frequently expect to repay late. While lenders do rely on additional punishments to enforce loans, the primary cost of not repaying on time is compounding of a very high interest rate. We develop a very simple model of the relational contract between loan sharks and borrowers and use it to predict the effect of a crackdown on illegal moneylending. Consistent with our model, the crackdown raised the interest rate and lowered the size of loans. |
| Keywords: | illegal lending, enforcement, relational contract |
| JEL: | K42 L14 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13360&r=all |
| By: | Roig, G. |
| Abstract: | This article examines the incentives for a buyer to undertake relationship-specific investment in the presence of multiple suppliers who provide a homogeneous input. When multiple suppliers compete for a single buyer, the buyer’s investment affects its outside option in the event of a relationship breakdown. Relationship-specific investment with a supplier thus reduces the buyer’s outside option, were there to be a supply breakdown with this supplier, but increases the buyer’s outside option with respect to a supply breakdown of competing suppliers. The extent to which suppliers offer trading contracts designed to substitute the trade loss from a relationship breakdown, therefore shapes the changes in the buyer’s outside option and its incentives to invest. The present paper shows that introducing competition to one side of the market reduces the hold-up problem associated with relationship-specific investment and establishes conditions where investment does not materialize. |
| Keywords: | Specific investment, Outside option, Relationship breakdown |
| JEL: | D4 L11 |
| Date: | 2020–06–19 |
| URL: | http://d.repec.org/n?u=RePEc:col:000092:018208&r=all |
| By: | Ludivine Roussey (UPD5 - Université Paris Descartes - Paris 5); Raphaël Soubeyran (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - INRA - Institut National de la Recherche Agronomique - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier) |
| Abstract: | We develop a double-sided moral hazard model in which the production of justice depends on two tasks (jurisdictional and administrative). The jurisdictional task can be provided only by a judge (the agent) while the administrative task can be provided either by the government (the principal) and/or by the judge. However, the judge performs the administrative task at a higher unit cost. First, we show that the rst-best situation is such that the judge exerts no effort to provide the administrative task. Second, we show that two forms of (second-best) optimal contract can emerge when neither the government's effort nor the judge's effort is contractible: either the incentives are shared between the government and the judge and the judge exerts no effort to provide the administrative task, or the judge faces high-powered incentives which induce her to exert effort to provide both tasks. Our model proposes a rationale for judges work overload observed in many countries. |
| Keywords: | double-sided moral hazard,task misallocation,judicial organization,production of judicial services |
| Date: | 2020–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02791013&r=all |