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on Contract Theory and Applications |
| By: | Yichun Chi; Xun Yu Zhou; Sheng Chao Zhuang |
| Abstract: | We study the design of an optimal insurance contract in which the insured maximizes her expected utility and the insurer limits the variance of his risk exposure while maintaining the principle of indemnity and charging the premium according to the expected value principle. We derive the optimal policy semi-analytically, which is coinsurance above a deductible when the variance bound is binding. This policy automatically satisfies the incentive-compatible condition, which is crucial to rule out ex post moral hazard. We also find that the deductible is absent if and only if the contract pricing is actuarially fair. Focusing on the actuarially fair case, we carry out comparative statics on the effects of the insured's initial wealth and the variance bound on insurance demand. Our results indicate that the expected coverage is always larger for a wealthier insured, implying that the underlying insurance is a normal good, which supports certain recent empirical findings. Moreover, as the variance constraint tightens, the insured who is prudent cedes less losses, while the insurer is exposed to less tail risk. |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2008.07103&r=all |
| By: | De Paola, Maria (University of Calabria); Gioia, Francesca (University of Milan); Pupo, Valeria (University of Calabria) |
| Abstract: | In this paper we investigate whether the framing of the incentives used to foster participation into contexts characterized by high degrees of time pressure affects individuals' self-selection. At this aim we run a lab-in-the-field experiment structured in two parts. The first part investigates individual characteristics that affect performance under time pressure, while the second is devoted to analyze how the decision to work under time pressure is affected by the reward/punishment framing of incentives. We find that individuals characterized by a high degree of risk aversion perform worse under time pressure. Nonetheless, when facing a penalty incentive scheme these individuals are more likely to choose to work with strict term limits, suggesting that penalty contracts might generate adverse selection problems. |
| Keywords: | time pressure, bonus, penalty, incentive schemes, framing, selection, lab-in-the-field experiment |
| JEL: | C9 C91 D01 D91 J33 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13474&r=all |
| By: | Akerlof, Robert (University of Warwick); Ashraf, Anik (LMU Munich); Macchiavello, Rocco (London School of Economics and Political Science); Rabbani, Atonu (University of Dhaka) |
| Abstract: | Conflicts between management and workers are common and can have significant impacts on productivity. We study how workers in a large Bangladeshi sweater factory responded to management’s decision to lay off about a quarter of the workers following a period of labor unrest. Our main finding is that the mass layoff resulted in a large and persistent reduction in the productivity of surviving workers. Moreover, it is specifically the firing of peers with whom workers had social connections – friends – that matters. We also provide suggestive evidence of deliberate shading of performance by workers in order to punish the factory’s management, and a corresponding deliberate attempt by the factory to win the angry workers back by selectively giving them tasks that are more rewarding. By combining ethnographic and survey data on the socialization process with the factory’s internal records, the paper provides a rare glimpse into the aftermath of an episode of labor unrest. A portrait of the firm emerges as a web of interconnected relational agreements supported by social connections. |
| Keywords: | Layoffs ; Productivity ; Morale ; Relational Contracts JEL codes: J50 ; M50 ; O12 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1293&r=all |