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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 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8414&r=all |
| By: | Saki Bigio (UCLA); Liyan Shi (EIEF) |
| Abstract: | We study repurchase options (repo contracts) in a competitive asset market with asymmetric information. Gains from trade emerge from a liquidity need, but private information about asset quality prevents the full realization of trade. We obtain a unique equilibrium, which features a pooling repo contract and full participation among borrowers. The equilibrium repo contract resolves adverse selection: the embedded repurchase option prevents the market unraveling that occurs in asset-sale markets. However, the contract is inefficient due to cream skimming. Competition to attract high-quality borrowers through the terms of the repurchase option inefficiently lowers liquidity. The equilibrium contract has a closed form and is portable to many applications. |
| JEL: | D82 G23 G32 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:169&r=all |
| By: | Wei Zhao; Claudio Mezzetti; Ludovic Renou; Tristan Tomala |
| Abstract: | We consider a dynamic moral hazard problem between a principal and an agent, where the sole instrument the principal has to incentivize the agent is the disclosure of information. The principal aims at maximizing the (discounted) number of times the agent chooses a particular action, e.g., to work hard. We show that there exists an optimal contract, where the principal stops disclosing information as soon as its most preferred action is a static best reply for the agent or else continues disclosing information until the agent perfectly learns the principal's private information. If the agent perfectly learns the state, he learns it in finite time with probability one; the more patient the agent, the later he learns it. |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2007.05983&r=all |
| By: | Gervais, Antoine |
| Abstract: | This paper develops a general equilibrium model of international trade in homogenous intermediate inputs. In the model, trade between countries is driven exclusively by uncertainty in the delivery of inputs. Because their managers are risk-averse, final good firms contract with multiple suppliers located in different countries in an attempt to decrease the variability of their profits. The analysis shows that risk diversification provides an incentive for international trade over and above such reasons as comparative advantages (emphasized in classical models of international trade) and economies of scale (emphasized in new trade models), and highlights a new channel – a reduction in uncertainty – through which trade liberalization increases welfare. |
| Keywords: | Intermediate inputs, international trade, sourcing, trade liberalization, uncertainty. |
| JEL: | F1 |
| Date: | 2020–08–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:102285&r=all |