nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2020‒11‒30
five papers chosen by
Guillem Roig
University of Melbourne

  1. Optimal Payment Contracts in Trade Relationships By Fischer, Christian
  2. The Impacts of Load-Following Forward Contracts By Brown, David P.; Sappington, David E.M.
  3. Optimal Collaterals in Multi-Enterprise Investment Networks By Moshe Babaioff; Yoav Kolumbus; Eyal Winter
  4. Retaking Control of Local Public Services A Step-by-Step Strategy. By Alexandre Mayol; Stéphane Saussier
  5. Manufacturer Cartels and Resale Price Maintenance By Hunold, Matthias

  1. By: Fischer, Christian
    Abstract: We study a seller's trade credit provision decision in a situation of repeated contracting with incomplete information over the buyer's payment propensity when the enforceability of formal contracts is uncertain. The payment terms of a transaction are selected in an inter-temporal trade-off between improving the quality of information acquisition and mitigating relationship breakdown risks. When contract enforcement institutions are weak, the optimal within-relationship provision dynamics of trade credit can be uniquely determined and depend on the share of patient buyers in the destination market as well as their access to liquidity. We obtain empirical evidence showing that in developing countries the relevance of trade credit in buyers' payment schedules has risen over-proportionally in recent years.
    Keywords: Payment contracts,Trade credit,Trade dynamics,Relational contracts,Weak institutions
    JEL: L14
    Date: 2020
  2. By: Brown, David P. (University of Alberta, Department of Economics); Sappington, David E.M. (University of Florida)
    Abstract: Load-following forward contracts (LFFCs) require a commodity supplier to deliver a specified fraction of the realized demand for the commodity at a fixed price. We show that in contrast to more standard forward contracts, LFFCs can promote higher commodity prices and reduced levels of consumer surplus and welfare. LFFCs are particularly likely to do so in the presence of limited demand uncertainty.
    Keywords: load-following forward contracts; swap contracts; electricity sector
    JEL: L51 L94 Q28 Q40
    Date: 2020–11–12
  3. By: Moshe Babaioff; Yoav Kolumbus; Eyal Winter
    Abstract: We study a market of investments on networks, where each agent (vertex) can invest in any enterprise linked to him, and at the same time, raise capital for his firm own enterprise from other agents he is linked to. Failing to raise sufficient capital results with the firm defaulting, being unable to invest in others. Our main objective is to examine the role of collaterals in handling the strategic risk that can propagate to a systemic risk throughout the network in a cascade of defaults. We take a mechanism design approach and solve for the optimal scheme of collateral contracts that capital raisers offer their investors. These contracts aim at sustaining the efficient level of investment as a unique Nash equilibrium, while minimizing the total collateral. Our main results contrast the network environment with its non-network counterpart (where the sets of investors and capital raisers are disjoint). We show that for acyclic investment networks, the network environment does not necessitate any additional collaterals, and systemic risk can be fully handled by optimal bilateral collateral contracts between capital raisers and their investors. This is, unfortunately, not the case for cyclic investment networks. We show that bilateral contracting will not suffice to resolve systemic risk, and the market will need an external entity to design a global collateral scheme for all capital raisers. Furthermore, the minimum total collateral that will sustain the efficient level of investment as a unique equilibrium may be arbitrarily higher, even in simple cyclic investment networks, compared with its corresponding non-network environment. Additionally, we prove computational-complexity results, both for a single enterprise and for networks.
    Date: 2020–11
  4. By: Alexandre Mayol; Stéphane Saussier
    Abstract: In this paper, we studied the influence of contract renewals on water prices in France. When studying French water contracts in force between 2008 and 2018, we found that contract renewals have little influence on the prices paid by consumers. However, at contract renewal times, the share of the price that goes to the firms decreases. This price decrease is compensated by an increase in the share of the price that is retained by the municipalities. We interpret this result as a willingness by municipalities to retake control of water services. We show that the higher the municipalities’ shares are, the higher the probability of switching to direct public management at contract renewal times. This suggests a step-by-step strategy, with local authorities first increasing their responsibilities in providing water services (i.e., increasing their price shares) before switching to direct public management.
    Keywords: Public-private partnerships; contract renewals; private management; water prices.
    JEL: H11 L33 L95
    Date: 2020
  5. By: Hunold, Matthias
    Abstract: We provide a theory of how RPM facilitate upstream cartels absent any information asymmetries using a model with manufacturer and retailer competition. Because retailers have an effective outside option to each manufacturer's contract, the manufacturers can only ensure contract acceptance by leaving a sufficient margin to the retailers. This restricts the wholesale price level even when manufacturers collude. In this context, resale price maintenance may only be profitable for the manufacturers if they collude. We thus provide a novel theory of harm for resale price maintenance when manufacturers collude and illustrate the fit of this theory in various competition policy cases.
    Keywords: resale price maintenance,collusion,retailing
    JEL: L41 L42 L81
    Date: 2020

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