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on Contract Theory and Applications |
| By: | Jessica Martin (INSA Toulouse); St\'ephane Villeneuve (TSE) |
| Abstract: | What type of delegation contract should be offered when facing a risk of the magnitude of the pandemic we are currently experiencing and how does the likelihood of an exogenous early termination of the relationship modify the terms of a full-commitment contract? We study these questions by considering a dynamic principal-agent model that naturally extends the classical Holmstr{\"o}m-Milgrom setting to include a risk of default whose origin is independent of the inherent agency problem. We obtain an explicit characterization of the optimal wage along with the optimal action provided by the agent. The optimal contract is linear by offering both a fixed share of the output which is similar to the standard shutdown-free Holmstr{\"o}m-Milgrom model and a linear prevention mechanism that is proportional to the random lifetime of the contract. We then tweak the model to add a possibility for risk mitigation through investment and study its optimality. |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2102.00001&r=all |
| By: | Mohammad Abbas Rezaei |
| Abstract: | General partners (GP) are sometimes paid on a deal-by-deal basis and other times on a whole-portfolio basis. When is one method of payment better than the other? I show that when assets (projects or firms) are highly correlated or when GPs have low reputation, whole-portfolio contracting is superior to deal-by-deal contracting. In this case, by bundling payouts together, whole-portfolio contracting enhances incentives for GPs to exert effort. Therefore, it is better suited to alleviate the moral hazard problem which is stronger than the adverse selection problem in the case of high correlation of assets or low reputation of GPs. In contrast, for low correlation of assets or high reputation of GPs, information asymmetry concerns dominate and deal-by-deal contracts become optimal, as they can efficiently weed out bad projects one by one. These results shed light on recent empirical findings on the relationship between investors and venture capitalists. |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2104.07049&r=all |
| By: | Claudius Gros; Daniel Gros |
| Abstract: | Delays in the availability of vaccines are costly as the pandemic continues. However, in the presence of adjustment costs firms have an incentive to increase production capacity only gradually. The existing contracts specify only a fixed quantity to be supplied over a certain period and thus provide no incentive for an accelerated buildup in capacity. A high price does not change this. The optimal contract would specify a decreasing price schedule over time which can replicate the social optimum. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:econpb:_33&r=all |
| By: | Yuta Kittaka; Noriaki Matsushima; Fuyuki Saruta |
| Abstract: | We investigate a model in which a monopoly supplier distributes two types of its product through a traditional retailer with a wholesale price contract and an online retailer with an agency contract. Because such an agency contract eliminates the double marginalization problem, the online retailer has a cost advantage over the traditional retailer. Given the advantage of the online retailer, we also consider a possible request by the traditional retailer: the retail price of the online retailer is not smaller than the wholesale price for the traditional retailer. We obtain the following results. An increase in the online retailer's bargaining power over the supplier benefits the two retailers but harms the supplier. Under the request to protect the traditional retailer, the wholesale price is strictly higher than that in the baseline model. The retailers' equilibrium prices are also strictly higher than those in the baseline model. The request benefits the supplier and the online retailer, but harms the traditional retailer. |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1123&r=all |