nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2021‒02‒22
five papers chosen by
Guillem Roig
University of Melbourne

  1. Free licensing strategy and ex post privatization in a mixed oligopoly By Cho, Sumi; Kim, Doori; Lee, Sang-Ho
  2. Permissioned Distributed Ledgers and the Governance of Money By Raphael Auer; Cyril Monnet; Hyun Song Shin
  3. Can Information Influence the Social Insurance Participation Decision of China's Rural Migrants? By Giles, John T.; Meng, Xin; Xue, Sen; Zhao, Guochang
  4. Limited liability, strategic default and bargaining power By Balatti, Mirco; López-Quiles, Carolina
  5. Static Pricing in Dynamic Sales By Martino Banchio; Frank Yang

  1. By: Cho, Sumi; Kim, Doori; Lee, Sang-Ho
    Abstract: This paper investigates free licensing strategy with a flexible privatization policy in a mixed oligopoly in which licensing contracts are observable before the government chooses its optimal degree of ex post privatisation. We examine and compare foreign and public licensors and explore the strategic relationship between the foreign share of passive ownership in domestic firms and the cost efficiency gap between licensor and licensee. We show that licensing strategies always yield more privatization and higher welfare, but the incentive for free licensing between the foreign licensor and public licensor differ. We also consider open technology, where all firms have the same technology and find a contrasting result. The optimal degree of privatization under open technology is the lowest (highest) under foreign (public) licensing contracts.
    Keywords: free licensing; foreign licensing; public licensing; technology gap; passive ownership; flexible privatization; optimal privatization; open technology
    JEL: D21 F68 L24
    Date: 2021–02
  2. By: Raphael Auer; Cyril Monnet; Hyun Song Shin
    Abstract: We explore the economics and optimal design of “permissioned” distributed ledger technology (DLT) in a credit economy. Designated validators verify transactions and update the ledger at a cost that is derived from a supermajority voting rule, thus giving rise to a public good provision game. Without giving proper incentives to validators, however, their records cannot be trusted because they cannot commit to verifying trades and they can accept bribes to incorrectly validate histories. Both frictions challenge the integrity of the ledger on which credit transactions rely. In this context, we examine the conditions under which the process of permissioned validation supports decentralized exchange as an equilibrium, and analyze the optimal design of the trade and validation mechanisms. We solve for the optimal fees, number of validators, supermajority threshold and transaction size. A stronger consensus mechanism requires higher rents be paid to validators. Our results suggest that a centralized ledger is likely to be superior, unless weaknesses in the rule of law and contract enforcement necessitate a decentralized ledger.
    Keywords: digital currencies, money, distributed ledger, blockchain, coordination game, global game, consensus, market design.
    JEL: C72 C73 D4 E42 G2 L86
    Date: 2021–02
  3. By: Giles, John T. (World Bank); Meng, Xin (Australian National University); Xue, Sen (Jinan University); Zhao, Guochang (Southwest University of Finance and Economics, Chengdu)
    Abstract: This paper uses a randomized information intervention to shed light on whether poor understanding of social insurance, both the process of enrolling and costs and benefits, drives the relatively low rates of participation in urban health insurance and pension programs among China's rural-urban migrants. Among workers without a contract, the information intervention has a strong positive effect on participation in health insurance and, among younger age groups, in pension programs. Migrants are responsive to price: in cities where the premia are low relative to earnings, information induces health insurance participation, while declines are observed in cities with high relative premia.
    Keywords: migration, social insurance, information, randomised controlled trial
    JEL: H53 H55 J46 J61 O15 O17 O53 P35
    Date: 2021–02
  4. By: Balatti, Mirco; López-Quiles, Carolina
    Abstract: In this paper we examine the effects of limited liability on mortgage dynamics. While the literature has focused on default rates, renegotiation, or loan rates individually, we study them together as equilibrium outcomes of the strategic interaction between lenders and borrowers. We present a simple model of default and renegotiation where the degree of limited liability plays a key role in agents' strategies. We then use Fannie Mae loan performance data to test the predictions of the model. We focus on Metropolitan Statistical Areas that are crossed by a State border in order to exploit the discontinuity in regulation around the borders of States. As predicted by the model, we find that limited liability results in higher default rates and renegotiation rates. Regarding loan pricing, while the model predicts higher interest rates for limited liability loans, we find no such evidence in the Fannie Mae data. We further investigate this by using loan application data, which contains the interest rates on loans sold to private vs public investors. We find that private investors do price in the difference in ex-ante predictable default risk for limited liability loans. JEL Classification: D10, E40, G21, R20, R30
    Keywords: debt repudiation, discontinuity, lender recourse, mortgage contracts, renegotiation
    Date: 2021–01
  5. By: Martino Banchio; Frank Yang
    Abstract: A monopolist sells items repeatedly over time to a consumer with persistent private information. The seller has limited commitment: she cannot commit to a long-term contract but always has the option to commit to posted prices for unsold items. We show that a static price path is the unique equilibrium outcome; that is, the seller cannot do better than simply posting the monopoly price for each item. The ratchet effect eliminates price discrimination gains for any degree of persistence of the private information. The paper also shows how dynamic mechanism design can help derive new results in games with limited commitment.
    Date: 2021–02

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