nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2021‒01‒18
three papers chosen by
Guillem Roig
University of Melbourne

  1. Mandatory Disclosure of Managerial Contracts in Nonprofit Organizations By Kopel, Michael; Marini, Marco A.
  2. The complementary nature of trust and contract enforcement By Björn Bartling; Ernst Fehr; David Huffman; Nick Netzer
  3. Corruption in the Times of Pandemia By Gallego, Jorge; Prem, Mounu; Vargas, Juan F.

  1. By: Kopel, Michael; Marini, Marco A.
    Abstract: Nonprofit organizations have been recently mandated to disclose the details of their executives’ compensation packages. Contract information is now accessible not only to current and prospective donors, but also to rival nonprofit organizations competing for donations in the fundraising market. Our aim is to investigate the impact of publicly available contract information on fundraising competition of nonprofit organizations. We argue that, although such provision makes contract information available to multiple stakeholders and increases the transparency of the nonprofit sector, it also induces nonprofits to use managerial incentive contracts strategically. In particular, we find that the observability of incentive contracts relaxes existing fundraising competition. This is beneficial in terms of nonprofits’ outputs, in particular when these organizations are trapped in a situation of excessive fundraising activities. However, we show that publicly available contract information distorts nonprofits’ choice of projects, thus potentially inducing socially inefficient project clustering.
    Keywords: Community/Rural/Urban Development
    Date: 2020–12–17
  2. By: Björn Bartling; Ernst Fehr; David Huffman; Nick Netzer
    Abstract: Under weak contract enforcement the trading parties’ trust, defined as their belief in the other party’s trustworthiness, appears important for realizing gains from trade. In contrast, under strong contract enforcement beliefs about the other party’s trustworthiness appear less important, suggesting that trust and contract enforcement are substitutes. Here, we show, however, that trust and contract enforcement are complements. We demonstrate that in a weak contract enforcement environment trust has no effect on the gains from trade, but when we successively improve contract enforcement, larger effects of trust emerge. We also document that improvements in contract enforcement lead to no, or only small, increases in gains from trade under low initial trust, but generate high increases in gains from trade when initial trust is high. Thus, the effect of improvements in contract enforcement is trust-dependent, and the effect of increases in trust is dependent on the strength of contract enforcement. We identify three key ingredients underlying this complementarity: (1) heterogeneity in trading partners’ trustworthiness; (2) strength of contract enforcement affecting the ability to elicit reciprocal behavior from trustworthy types, and screen out untrustworthy types; (3) trust beliefs determining willingness to try such strategies.
    Keywords: Trust, contract enforcement, complementarity, equilibrium selection, causal effect, screening, belief distortions, institutions
    JEL: C91 D02 D91 E02
    Date: 2021–01
  3. By: Gallego, Jorge; Prem, Mounu; Vargas, Juan F.
    Abstract: The public health and economic crisis caused by the COVID-19 pandemic has pushed governments to substantially and swiftly increase spending. Consequently, public procurement rules have been relaxed in many places to expedite transactions. However, this may also create opportunities for inefficiency and corruption. Using contract-level information on public spending from Colombia’s e-procurement platform, and a difference-in-differences identification strategy, we find that municipalities classified by a machine learning algorithm as more prone to corruption react to the spending surge by using a larger proportion of discretionary non-competitive contracts and increasing their average value, especially to procure crisis-related items. Additionally, in places that rank higher on our corruption scale, contracts signed during the emergency are more likely to have cost overruns, be awarded to campaign donors, and exhibit implementation inefficiencies. Our evidence suggests that these negative shocks may increase waste and corruption, and thus governments should bolster instances of monitoring and oversight.
    Date: 2020–12–30

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