nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2020‒07‒27
five papers chosen by
Guillem Roig
University of Melbourne

  1. Goal-Oriented Agents in a Market By Inés Macho-Stadler; David Pérez-Castrillo; Nicolas Quérou
  2. Coalition-Proof Risk Sharing Under Frictions By Cole, Harold; Krueger, Dirk; Mailath, George J; Park, Yena
  3. Expectational Equilibria in Many-to-one Matching Models with Contracts - A Reformulation of Competitive Equilibrium By Herings, P. Jean-Jacques
  4. Incentives and Performance of Agents in a Microfinance Bank By Surajeet Chakravarty; Sumedh Dalwai; Pradeep Kumar
  5. Corporate Culture as a Theory of the Firm By Gary B. Gorton; Alexander K. Zentefis

  1. By: Inés Macho-Stadler; David Pérez-Castrillo; Nicolas Quérou
    Abstract: We consider a market where "standard" risk-neutral agents coexist with "goal-oriented" agents who, in addition to the expected income, seek a high-enough monetary payoff¤ (the "trigger") to fulfill a goal. We analyze a two-sided one-to-one matching model where the matching between principals and agents and the incentive contracts are endogenous. In any equilibrium contract, goal-oriented agents are matched with the principals with best projects and receive the trigger with a positive probability. Moreover, goal and monetary incentives are complementary since goal- oriented agents receive stronger monetary incentives than standard agents. Finally, we discuss policy interventions in relevant environments.
    Keywords: goal-oriented agents, Incentives, matching market
    JEL: D82 D86
    Date: 2020–07
  2. By: Cole, Harold; Krueger, Dirk; Mailath, George J; Park, Yena
    Abstract: We analyze efficient risk-sharing arrangements when coalitions may deviate. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the original coalition and any deviating coalition rely on a belief in future cooperation, and we treat the contracting conditions of original and deviating coalitions symmetrically. We show that better belief coordination (higher social capital) tightens incentive constraints since it facilitates both the formation of the original as well as a deviating coalition. As a consequence, the payoff of successfully formed coalitions might be declining in the degree of belief coordination and equilibrium allocations might feature resource burning or utility burning.
    Keywords: Coalitions; Limited Commitment; Risk Sharing
    JEL: E20
    Date: 2020–01
  3. By: Herings, P. Jean-Jacques (RS: GSBE Theme Data-Driven Decision-Making, RS: GSBE Theme Conflict & Cooperation, Microeconomics & Public Economics)
    Abstract: We introduce the notion of expectational equilibrium in a very general specification of the many-to-one matching with contracts model. The endogenous variables in an expectational equilibrium are expectations about tradable contracts. Expectational equilibrium outcomes are equivalent to stable outcomes. Substitutability of preferences is a sufficient condition for existence. Expectational equilibrium unifies all the other approaches used in the literature so far, in particular Walrasian equilibrium, Drèze equilibrium, and market clearing cutoffs. It also applies to cases where contracts do not involve money as well as cases where there is a smallest monetary unit of account.
    JEL: C71 C78 D45 D51
    Date: 2020–07–02
  4. By: Surajeet Chakravarty (University of Exeter); Sumedh Dalwai (University of Exeter); Pradeep Kumar (University of Exeter)
    Abstract: An important aspect of providing credit to the poor is the mechanism adopted by the credit institutions to do so. Most microfinance banks use field agents to acquire new borrowers, manage the account and collect repayments. How does the supply of credit change with a change in incentives provided to such field agents? Mann Deshi Bank, a microfinance bank in India, changed its remuneration scheme from a pure commission based to a mixed scheme with a combination of a base salary and other incentives. This paper examines the effect it had on the effort and the performance of the agents by using a rich panel data on the bankÕs joint liability lending product. The results show that the change in the contract form with a large flat wage and reduced incentives improved performance of the agents in terms of the quantity (increase in the number of borrowers acquired) and quality (the borrowers acquired had fewer delays in repayments). We find evidence of mixed contract agents exerting significantly more effort than the pure commission agents to ascertain borrower quality.
    Keywords: Micro-finance institutions, joint liability loans, labor contracts, moral hazard
    JEL: G21 O12 J41
    Date: 2020
  5. By: Gary B. Gorton; Alexander K. Zentefis
    Abstract: Markets and firms offer contrasting methods to arrange production. In markets, contracts govern the purchase of parts and services that compose production. In firms, the shared values, customs, and norms coming from a corporate culture govern employees’ joint development of those parts and services. We argue for this distinction as a theory of the firm. Firms exist because corporate culture at times is more efficient at carrying out production than detailed contracts. The firm’s boundary encircles the parts of production for which a manager optimally chooses corporate culture as the organizing device. The model can explain why some mergers and acquisitions fail, in a way consistent with empirical evidence, and why corporate cultures are hard to change.
    JEL: D02 D4 G30
    Date: 2020–06

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