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on Contract Theory and Applications |
| By: | Matthew J. Walker (Durham University Business School); Elena Katok (Naveen Jindal School of Management, University of Texas at Dallas); Jason Shachat (Durham University Business School) |
| Abstract: | When product quality is unverifiable by third parties, enforceable contracts that condition price upon quality are not feasible. If higher quality is also costly to deliver, moral hazard by sellers flourishes, particularly when procurement is via a competitive auction process. Retainage is a contractual mechanism that presents a solution to the third-party unverifiability problem, by setting aside a portion of the purchase price. After delivery, the buyer has sole discretion over the amount of retainage money that is released to the seller. While generally a feasible contract form to implement, retainage introduces a moral hazard for the buyer. We use laboratory experiments to investigate how and when retainage might be successfully used to facilitate trust and trustworthiness in procurement contracts. We observe that retainage induces a significant improvement in product quality when there are some trustworthy buyers in the population, consistent with a model of fair payment norms that we develop. This improvement is realized at the cost of increased buyer-seller profit inequalities. We also observe that at high levels of retainage, there is a welfaredecreasing market unraveling in which sellers do not bid on contracts. Our results imply that retainage incentives can mitigate the tension between competition and cooperation arising from reverse auctions, but only at appropriate levels of retainage |
| Keywords: | trust, procurement, reverse auction, retainage, moral hazard |
| JEL: | C92 L15 D86 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:20-34&r=all |
| By: | Leaver, Clare (University of Oxford); Ozier, Owen (Williams College); Serneels, Pieter (University of East Anglia); Zeitlin, Andrew (Georgetown University) |
| Abstract: | This paper reports on a two-tiered experiment designed to separately identify the selection and effort margins of pay-for-performance (P4P). At the recruitment stage, teacher labor markets were randomly assigned to a pay- for-percentile or fixed-wage contract. Once recruits were placed, an unexpected, incentive-compatible, school-level re-randomization was performed, so that some teachers who applied for a fixed-wage contract ended up being paid by P4P, and vice versa. By the second year of the study, the within-year effort effect of P4P was 0.16 standard deviations of pupil learning, with the total effect rising to 0.20 standard deviations after allowing for selection. |
| Keywords: | pay-for-performance, selection, incentives, teachers, field experiment |
| JEL: | C93 I21 J45 M52 O15 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13696&r=all |
| By: | Evan M. Herrnstadt (Congressional Budget Office); Ryan Kellogg (University of Chicago - Harris School of Public Policy); Eric Lewis (Texas A&M University) |
| Abstract: | Oil and gas leases between mineral owners and extraction firms ubiquitously include royalty and primary term clauses. The royalty denotes the share of revenue that is paid to the mineral owner, and the primary term specifies the date by which the firm must complete a well, lest it lose the lease. Using data from the Louisiana shale boom, we first show that wells' drilling timing is substantially bunched just before lease expiration, raising the question of why leases include development deadlines that distort drilling decisions. We then develop a contracting model in which mineral owners face firms with private information and have the ability to contract on both realized revenue and drilling timing. We show that primary terms can increase both the owner's expected revenue and total surplus because they counteract the delay incentives imposed by the royalty. |
| JEL: | D82 D86 L24 L71 Q35 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:2020-66&r=all |