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on Contract Theory and Applications |
| By: | Matthias Fahn |
| Abstract: | This paper analyzes a dynamic relational contract for employees with reciprocal preferences. I develop a tractable model to investigate how “direct” performance-pay (promising a bonus in exchange for effort) and generous upfront wages (which activate the norm of reciprocity) interact over the course of an employee’s career. I show that firms can benefit from committing to paying non-discretionary wages in the future as this boosts their credibibility in the relational contract. The reason is that these wages have to be paid under any circumstances, whereas employees only reciprocate if the firm has kept its promises. Moreover, I demonstrate that more intense competition for workers can intensify the use of reciprocity-based incentives. |
| Keywords: | reciprocity, relational contracts, commitment, norms and social preferences |
| JEL: | C73 D21 D86 D90 D91 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2020-12&r=all |
| By: | Jorge Lemus (University of Illinois Urbana-Champaign); Emil Temnyalov (University of Technology Sydney); John L. Turner (University of Georgia) |
| Abstract: | In liability lawsuits (e.g. product liability or patent infringement), a third party demands compensation from a firm. Verifying that the firm harmed the third party requires a costly lawsuit, so parties often negotiate a settlement agreement. Liability insurance improves the firmÕs bargaining leverage when negotiating this settlement. We study this leverage effect of insurance and characterize equilibrium contracts under symmetric and asymmetric information: in a competitive market, only a pooling equilibrium with under-insurance may exist; in a monopolistic setting, the insurer offers at most two contracts which under-insure low-risk types and may inefficiently induce high-risk types to litigate. |
| Keywords: | liability; insurance; litigation; bargaining; adverse selection; competitive equilibrium; monopoly |
| JEL: | C7 D82 G22 K1 K41 |
| Date: | 2019–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:ecowps:2019/11&r=all |
| By: | Dyotona Dasgupta (Delhi School of Economics); Dilip Mookherjee (Boston University) |
| Abstract: | We characterize Pareto efficient long term ‘relational’ lending contracts with one-sided lender commitment, to finance specific investments and smooth intertemporal consumption of a borrower who cannot commit to repaying loans. The borrower can save and accumulate assets, and has strictly concave preferences over consumption. For borrowers with initial wealth above a threshold, the first-best is sustainable with a stationary contract. For poorer agents, there is perpetual but shrinking underinvestment which disappears in the long run. Borrowing, investment and wealth grow and converge to the first-best threshold. Optimal allocations can be implemented by backloaded ‘progressive’ lending: a sequence of one period loans of growing size. Increased borrower bargaining power raises short run consumption and investment, with no long term effects. We discuss extensions to incorporate random productivity shocks. |
| Keywords: | Dynamic Contracts, Progressive Lending, Microfinance |
| JEL: | O16 G21 D86 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:bos:iedwpr:dp-348&r=all |
| By: | Soham Baksi; Pinaki Bose; Marc T. Law |
| Abstract: | Incomplete contracts and inadequate enforcement of labor rights, together with the asymmetry of power between a worker and her employer, create an environment where the employer can forcibly extract additional services (e.g. unpaid overtime or sexual favors) from the worker beyond the mutually agreed terms of exchange. We show that coercive impositions can co-exist with voluntary transactions in the labour market, and that a positive incidence of coercion can adversely affect the efficiency of the corresponding market transactions. This may justify banning the legal market for the additional service if it is regarded as "obnoxious" by society. |
| JEL: | O17 D61 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:win:winwop:2020-01&r=all |