nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2021‒05‒17
three papers chosen by
Guillem Roig
University of Melbourne

  1. Incentive contracts when agents distort probabilities By Víctor González-Jiménez
  2. Goal-oriented agents in a market By Inés Macho-Stadler; David Pérez-Castrillo; Nicolas Quérou
  3. Intellectual Property-Related Preferential Trade Agreements and Offshoring to Developing Countries By Canals, Claudia; Klein, Michael A; Sener, Fuat

  1. By: Víctor González-Jiménez
    Abstract: I show that stochastic contracts are powerful motivational devices when agents distort probabilities. Stochastic contracts allow the principal to target probabilities that, when distorted by the agent, enhance the agent's motivation to exert effort on the delegated task. This novel source of incentives is absent in traditional contracts. A theoretical framework and an experiment demonstrate that stochastic contracts targeting small probabilities, and thus exposing the agent to a large degree of risk, generate higher performance levels than traditional contracting modalities. A result that contradicts the standard rationale that optimal contracts should feature a tradeoff between insurance and efficiency. This unintuitive finding is attributed to probability distortions caused by likelihood insensitivity - cognitive limitations that restrict the accurate evaluation of probabilities.
    JEL: C91 C92 J16 J24
    Date: 2101–05
  2. By: Inés Macho-Stadler (UAB - Universitat Autònoma de Barcelona); David Pérez-Castrillo (UAB - Universitat Autònoma de Barcelona); Nicolas Quérou (CEE-M - Centre d'Economie de l'Environnement - Montpellier - UMR 5211 - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: We consider a market where "standard" risk-neutral agents coexist with "goaloriented" agents who, in addition to the expected income, seek a high-enough monetary payoff (the "trigger") to fulfill a goal. We analyze a two-sided one-to-one matching model where the matching between principals and agents and incentive contracts are endogenous. In any equilibrium contract, goal-oriented agents are matched with the principals with best projects and receive the trigger with positive probability. Moreover, goal and monetary incentives are complementary: goaloriented agents receive stronger monetary incentives. Finally, we discuss policy interventions in relevant environments.
    Keywords: Goal-oriented agents,incentives,matching market
    Date: 2021–06
  3. By: Canals, Claudia; Klein, Michael A; Sener, Fuat
    Abstract: International standards in the protection of intellectual property rights (IPRs) are increasingly guided by bilateral and regional preferential trade agreements (PTAs). In this paper, we estimate the effect of these IP-related PTAs on US offshoring behavior in developing countries. We utilize a difference-in-difference empirical methodology that addresses several possible sources of endogeneity and exploits industry variation in the importance of IPRs to identify the effect of these PTA-induced IPR reforms. We find that IP-related PTAs are associated with a substantial increase in US offshoring in IPR-intensive industries relative to non-IPR-intensive industries. This increase occurs both within the boundaries of the multinational firm and through arm’s-length contracts with domestic firms. We do not find strong evidence for a compositional shift towards either type of offshoring. These findings provide direct empirical evidence that PTA-induced IPR reform stimulates multinational activity in developing countries.
    Keywords: Intellectual property rights; Patents; Preferential trade agreements; Offshoring; Outsourcing; Subcontracting; Multinational firms
    JEL: F13 F23 O33 O34
    Date: 2021–05–11

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