nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2020‒11‒16
three papers chosen by
Guillem Roig
University of Melbourne

  1. Cartel deterrence and manager labor market in US and EU antitrust jurisdictions: theory and experimental data By Miguel A. Fonseca; Ricardo Gonçalves; Joana Pinho; Giovanni Tabacco
  2. Robust Moral Hazard with Distributional Ambiguity By Li, Zhaolin
  3. Multi-Layer Profit Sharing and Innovation By Filippo Belloc

  1. By: Miguel A. Fonseca (Department of Economics, University of Exeter and NIPE, Universidade do Minho); Ricardo Gonçalves (Universidade Católica Portuguesa, Católica Porto Business School and CEGE); Joana Pinho (Universidade Católica Portuguesa, Católica Porto Business School and CEGE); Giovanni Tabacco
    Abstract: We explore the consequences to contract design if firm shareholders are intent on their managers engaging in price exing activities under different legal regimes. We show that in fine-only legal regimes, optimal contracts must have a fixed wage. In contrast,in fine-plus-prosecution legal regimes optimal contracts must be high-powered,involving a variable component. We test these predictions in a laboratory experiment. We observe contract choices of firm owners, for a given legal regime, as well as the likelihood of managers forming explicit cartels and coordinating on prices in an indefinitely repeated Bertrand oligopoly, taking contract and legal regime as given. The data show that prosecuting managers leads to lower collusion, but high-powered contracts do not incentivize cartel formation or price coordination effectively, irrespective of legal regime. Nevertheless, high-powered contracts were most frequently chosen by firm owners, often with collusive intents.
    Keywords: Straight Bonds; cartel formation, antitrust, managerial compensation, experiment.
    JEL: L44 C90 L13 C70
    Date: 2020–10
  2. By: Li, Zhaolin
    Abstract: We present a moral hazard model in which both the entrepreneur and investor face limited liability and employ a robust decision rule that maximizes their worst-case expected profit when distributional ambiguity exists. Applying strong duality, we reformulate the robust moral hazard model by introducing a new set of incentive compatibility constraints associated with choosing the most unfavourable distribution. We develop a one-step-ahead method using shadow prices for such probabilistic resources as mean and variance to characterize the robustly optimal contract and to improve the commonly used debt contract.
    Keywords: Debt contract; Moral hazard; Robust optimization
    Date: 2020–10–14
  3. By: Filippo Belloc
    Abstract: In this paper, we measure whether contractual profit sharing (PS) influences firm innovation and, if yes, how. We disentangle PS effects for different and possibly conflicting interest groups within the firm. We exploit the fact that PS schemes rarely cover the workers all together, but more often than not are used at some layer in the corporate hierarchy and not at others. Based on the analysis of a representative sample of Italian rms, the key contribution of the study is to show that the structure of PS plans matters significantly for innovation. While PS for managers is associated with little or no improvement in innovation activity, PS for non-managers spurs the probability of observing innovation by about 5% to 15%. This may reflect different discount factors of employees at different firm layers. We also document how PS effects, particularly for non-managers, change depending on other firm level variables, such as size, unionization, exposure on international markets, the span of managerial control and some characteristics of the workforce. Policy implications are discussed.
    Keywords: profit sharing, innovation, incentive pay, teamwork
    JEL: J33 K31 M52 O31
    Date: 2020–08

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