|
on Contract Theory and Applications |
| By: | Yuliyan Mitkov (University of Bonn) |
| Abstract: | I propose a theory of debt maturity as an incentive device to motivate innovation when contracts are fundamentally incomplete and shaped by ex-post renegotiation. The financing of innovative firms must balance two goals. On the one hand, since innovation is inherently risky, the entrepreneur must receive adequate protection after failure. Simultaneously, the firm must be liquidated when its assets can be redeployed more efficiently elsewhere. Meeting these two goals can be especially challenging when contracts are incomplete. I show how an appropriate choice of debt maturity, together with ex-post contract renegotiation, embeds a "put option" into the firm's capital structure. The put is exercised when liquidation is efficient, and it partially insures the entrepreneur against failure and thus motivates innovation. The theory has novel empirical implications for the financing patterns of innovative firms. |
| Keywords: | Innovation, Debt maturity, Incomplete contracts, Renegotiation |
| JEL: | C78 D82 D86 G32 G33 O31 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:050&r=all |
| By: | Bassanini, Andrea (OECD); Caroli, Eve (Université Paris-Dauphine); Fontaine, Francois (Paris School of Economics); Rebérioux, Antoine (Université de Paris) |
| Abstract: | We develop a simple theoretical model showing that, by adding to the adjustment costs associated with permanent contracts, local social pressure against dismissals creates an incentive for CEOs to rely on fixed-term contracts, in an attempt to escape social pressure. Using linked employer-employee data, we show that establishments located closer to headquarters have higher shares of fixed-term contracts in hiring than those located further away whenever firms' headquarters are located in self-centered communities and the CEO not only works but also lives there. We show that these findings can only be explained by local social pressure. |
| Keywords: | social pressure, employment contracts, adjustment costs, CEO reputation |
| JEL: | J23 J41 M14 M55 R12 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp14029&r=all |
| By: | Sarah Auster; Nicola Pavoni |
| Abstract: | We study the delegation problem between a principal and an agent, who not only has better information about the performance of the available actions but also has superior awareness of the set of actions that are actually feasible. The agent decides which of the available actions to reveal and which ones to hide. We provide conditions under which the agent finds it optimal to leave the principal unaware of relevant options. By doing so, the agent increases the principal's cost of distorting the agent's choices and thereby increases the principal's willingness to grant him higher information rents. We also consider communication between the principal and the agent after the contract is signed and the agent receives information. We show that limited awareness of actions improves communication in such signalling games: the principal makes a coarser inference from the recommendations of the privately informed agent and accepts a larger number of his proposals. |
| Keywords: | Unawareness, optimal delegation, strategic disclosure |
| JEL: | D82 D83 D86 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_256&r=all |
| By: | Fugger, Nicolas; Laitenberger, Ulrich |
| Abstract: | Problem Definition: We consider a buyer that needs to source a fixed quantity. She faces several potential suppliers that might fail to deliver. The buyer conducts a procurement auction to determine contract suppliers and can choose between single-sourcing and multi-sourcing. If contract suppliers fail to deliver, the buyer tries to source from non-contract suppliers but has little bargaining power due to time pressure. Academic/Practical Relevance: The mitigation of supply risks plays an important role in procurement practice but attracted little attention in the academic analysis of procurement auctions. Academic research on multi-sourcing procurement auction typically analyzes these auctions as stand-alone events. In contrast, we investigate the influence of the auction design on the post-auction market structure and identify an effect favoring multi-sourcing. The insights provide procurement managers guidance for their sourcing decisions. Methodology: We apply game-theoretical methods to analyze a stylized model in which a cost-minimizing buyer needs to source from profit-maximizing suppliers who might fail to deliver. The buyer conducts a procurement auction to determine contract suppliers and can choose between single-sourcing and multi-sourcing. If contract suppliers fail to deliver, the buyer tries to source from a non-contract supplier. We assume that in this situation, the non-contract supplier has almost all the bargaining power. Results: First, we show that in such a setting multi-sourcing does not only reduce the supply risk but might also yield lower prices than single-sourcing. The sourcing decision affects the post-auction market structure such that being a non-contract supplier becomes less attractive in case of multi-sourcing. Second, if suppliers are heterogeneous regarding their disruption probabilities, less reliable suppliers will bid more aggressively than their more reliable competitors causing an adverse selection problem. Furthermore, we show that attracting an additional supplier can be risky as it can increase the auction price and the buyer's total expenses. Managerial Implications: Our analysis reveals a pro-competitive effect of multi-sourcing. This effect is especially important if the buyer's value for the item is substantially larger than suppliers' production costs and for intermediate disruption probabilities. |
| Keywords: | Adverse selection,auctions,multi-sourcing,supply disruptions,procurement |
| JEL: | D44 D47 H57 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:20082&r=all |
| By: | Rodrigo Carril |
| Abstract: | I study the trade-off between rules and discretion in the context of US federal procurement. Below an arbitrary threshold amount, contracts can be awarded using procedures that are subject to significantly fewer rules and less oversight. Leveraging a change in the threshold value, I document three key empirical findings. First, there is substantial bunching of contracts at the threshold. Second, the added scrutiny introduced by rules distorts the award amount of some contracts, while discouraging other purchases altogether. Third, contracts subject to more scrutiny perform worse ex post. I propose and estimate a stylized model of public procurement that is consistent with these findings. I find that, at current levels, the benefits from waste prevention are modest relative to the size of the compliance costs introduced by regulation. I find that the optimal threshold is substantially higher than the current one, and that a proposed increase in the threshold will leave the government better off. The model highlights the key role of incentive misalignment in bureaucracies, and shows quantitatively how increased discretion can be optimal as misalignment is reduced. |
| Keywords: | public procurement, Bureaucracy, discretion, Regulation, compliance |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1232&r=all |
| By: | Schmitz, Patrick W. |
| Abstract: | The analysis of adverse selection problems in seller-buyer relationships has typically been based on the assumption that private information is uncertifiable, while in practice it may well be certifiable. If a buyer has certifiable private information, he can conceal evidence, but he cannot claim to have information for which he has no evidence, so he has fewer possibilities to misrepresent his information. Nevertheless, we find that the expected total surplus can be strictly smaller in the case of certifiable information than in the case of uncertifiable information. This finding holds when the buyer may have private information with some exogenous probability as well as in the case of opportunistic information gathering, where the buyer can privately decide whether or not to acquire information for strategic reasons. |
| Keywords: | Contracting; Asymmetric information; Adverse selection; Screening; Information gathering |
| JEL: | D82 D86 L24 M11 M4 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:105106&r=all |
| By: | Fischer, Christian; Rasch, Alexander; Wenzel, Tobias |
| Abstract: | This paper analyzes a market in which two horizontally differentiated firms compete by setting menus of two-part tariffs, and in which some consumers are not informed about the linear per-unit price component. We consider two regulatory interventions that limit firms' ability to price discriminate: (i) diminishing the range of contracts via a reduction in the number of two-part tariffs offered (which prohibits inter-group price discrimination), and (ii) a reduction in tariff complexity via the abolishment of linear fees (which prohibits inter- and intra-group price discrimination). We characterize the effects of these interventions on firm profits and (informed and uninformed) consumer welfare, and identify conditions for the optimal policy. Our results provide insights for the evaluation of recent policy interventions (e.g., the regulation of roaming charges in the EU market). |
| Keywords: | Two-part tariffs,Consumer attention,Policy intervention |
| JEL: | D43 L13 L42 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:20075&r=all |
| By: | Seth Garz; Xavier Giné; Dean Karlan; Rafe Mazer; Caitlin Sanford; Jonathan Zinman |
| Abstract: | Markets for consumer financial services are growing rapidly in low and middle income countries and being transformed by digital technologies and platforms. With growth and change come concerns about protecting consumers from firm exploitation due to imperfect information and contracting as well as from their own decision-making limitations. We seek to bridge regulator and academic perspectives on these underlying sources of harm and five potential problems that can result: high and hidden prices, overindebtedness, post-contract exploitation, fraud, and discrimination. These potential problems span product markets old and new, and could impact micro- and macroeconomies alike. Yet there is little consensus on how to define, diagnose, or treat them. Evidence-based consumer financial protection will require substantial advances in theory and especially empirics, and we outline key areas for future research. |
| JEL: | D11 D12 D18 D81 D82 D83 D9 G21 K23 K31 K42 O12 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28262&r=all |
| By: | Matteo Brachetta; Claudia Ceci |
| Abstract: | We investigate an optimal reinsurance problem for an insurance company facing a constant fixed cost when the reinsurance contract is signed. The insurer needs to optimally choose both the starting time of the reinsurance contract and the retention level in order to maximize the expected utility of terminal wealth. This leads to a mixed optimal control/optimal stopping time problem, which is solved by a two-step procedure: first considering the pure reinsurance stochastic control problem and next discussing a time-inhomogeneous optimal stopping problem with discontinuous reward. Using the classical Cram\'er-Lundberg approximation risk model, we prove that the optimal strategy is deterministic and depends on the model parameters. In particular, we show that there exists a maximum fixed cost that the insurer is willing to pay for the contract activation. Finally, we provide some economical interpretations and numerical simulations. |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2101.04975&r=all |