nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2021‒03‒22
four papers chosen by
Guillem Roig
University of Melbourne

  1. Contracts for acquiring information By Aubrey Clark; Giovanni Reggiani
  2. The Right to Quit Work: An Efficiency Rationale for Restricting the Freedom of Contract By Müller, Daniel; Schmitz, Patrick W.
  3. Grievance Redress by Courts in Consumer Finance Disputes. By Gulati, Karan; Sane, Renuka
  4. Mean Field Contest with Singularity By Marcel Nutz; Yuchong Zhang

  1. By: Aubrey Clark; Giovanni Reggiani
    Abstract: This paper studies the provision of incentives for information acquisition. Information is costly for an agent to acquire and unobservable to a principal. We show that any Pareto optimal contract has a decomposition into a fraction of output, a state-dependent transfer, and an optimal distortion. Under this decomposition: 1) the fraction of output paid is increasing in the set of experiments available to the agent, 2) the state-dependent transfer indexes contract payments to account for differences in output between states, 3) the optimal distortion exploits complementarities in the cost of information acquisition: experiment probabilities unalterable via contract payments stuck against liability limits are substituted for, the substitution occurring according to complementarities in the cost of information acquisition, and 4) if and only if the agent's cost of experimentation is mutual information, the optimal distortion takes the form of a decision-dependent transfer.
    Date: 2021–03
  2. By: Müller, Daniel; Schmitz, Patrick W.
    Abstract: A principal hires an agent to provide a verifiable service. Initially, the agent can exert unobservable effort to reduce his disutility from providing the service. If the agent is free to waive his right to quit, he may voluntarily sign a contract specifying an inefficiently large service level, while there are insufficient incentives to exert effort. If the agent's right to quit is inalienable, the underprovision of effort may be further aggravated, but the service level is ex post efficient. Overall, it turns out that the total surplus can be larger when agents are not permitted to contractually waive their right to quit work. Yet, we also study an extension of our model in which even the agent can be strictly better off when the parties have the contractual freedom to waive the agent's right to quit.
    Keywords: Moral hazard; Incentive theory; Labor contracts; Efficiency wages; Law and economics
    JEL: D23 D86 J83 K12 K31 M55
    Date: 2021
  3. By: Gulati, Karan (National Institute of Public Finance and Policy); Sane, Renuka (National Institute of Public Finance and Policy)
    Abstract: This paper studies how courts in India have dealt with consumer finance disputes. It presents the organisation of the courts that hear consumer finance cases. It reviews the 60 most cited cases to study the position that courts have taken in banking and insurance disputes. For the cases studied, it finds that courts have generally granted relief to consumers in banking disputes. In the case of insurance, courts have emphasised contractual compliance. This is so even if the contracts themselves were opaque or had unfair terms. The paper also finds that courts award low compensation and take a long time for adjudication. It suggests that courts should put in place systems to facilitate class action suits and bring in specialisation to deal with consumer finance disputes.
    Date: 2021–03
  4. By: Marcel Nutz; Yuchong Zhang
    Abstract: We formulate a mean field game where each player stops a privately observed Brownian motion with absorption. Players are ranked according to their level of stopping and rewarded as a function of their relative rank. There is a unique mean field equilibrium and it is shown to be the limit of associated $n$-player games. Conversely, the mean field strategy induces $n$-player $\varepsilon$-Nash equilibria for any continuous reward function -- but not for discontinuous ones. In a second part, we study the problem of a principal who can choose how to distribute a reward budget over the ranks and aims to maximize the performance of the median player. The optimal reward design (contract) is found in closed form, complementing the merely partial results available in the $n$-player case. We then analyze the quality of the mean field design when used as a proxy for the optimizer in the $n$-player game. Surprisingly, the quality deteriorates dramatically as $n$ grows. We explain this with an asymptotic singularity in the induced $n$-player equilibrium distributions.
    Date: 2021–03

This nep-cta issue is ©2021 by Guillem Roig. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.