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on Contract Theory and Applications |
| By: | Antoine L. Noël; Amy Hongfei Sun |
| Abstract: | We propose a theory of optimal firm financing given nested information problems of adverse selection and agency cost. We prove that there exists a unique perfect Bayesian equilibrium with novel features: First, three types of optimal contracts arise endogenously, i.e., equity, transparent debt and opaque debt. Equity and transparent debt are both informational transparent because these contracts require firms to take on a costly technology for verifying types. Opaque debt, however, merely reflects the general information of firms seeking external funds. Any signaling contract that does not involve costly verification does not survive the equilibrium. Second, the equilibrium is either pooling on opaque debt, or mixing with transparent and opaque financing. Third, debt weakly dominates equity. Finally, the optimal debt-to-equity ratio is unique for all firms in a pooling equilibrium, but only for a strict subset of firms in a mixing equilibrium. |
| Keywords: | Optimal Contracts, Capital Structure, External Financing, Asymmetric Information, Information Transparency |
| JEL: | D82 D86 G32 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1459&r= |
| By: | Furmaco, L. (Department of Economics and the Murphy Institute, Tulane University, IZA, GLO); Longley, N. (Department of Business, Nevada State College); Palermo, A. (Institute for Labour Law and Industrial Relations in the European Union); Rossi, G. (University of Birkbeck, London) |
| Abstract: | We investigate whether employees vary their performance during fixed-term contracts. We follow National Hockey League players’ performance over ten seasons. We use a two-stage least square fixed effect model to address empirical limitations in previous studies. We find that players’ performance varies at the end of the contract depending on ability, tenure, and (geographical) willingness to move. In particular, long-tenure and low-ability short-tenure workers vary their performance, depending on their continent of origin; these results might be due to different willingness to move, at different stages of players’ career. |
| Keywords: | fixed-term contracts, incentives, shirking behavior, strategic behavior |
| JEL: | D82 J24 J33 M52 Z22 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:2107&r= |
| By: | Seungjin Han |
| Abstract: | This paper proposes a general competing mechanism game of incomplete information where a mechanism allows its designer to send a message to himself at the same time agents send messages. This paper introduces a notion of robust equilibrium. If each agent’s payoff function is separable with respect to principals’ actions, they lead to the full characterization of equilibrium allocations in terms of incentive compatible direct mechanisms without reference to the set of arbitrary mechanisms allowed in the game. Szentes’ Critique (Szentes (2010)) on the standard competing mechanism game of complete information is also valid in a model with incomplete information. |
| Keywords: | competing mechanisms; robust equations; general mechanisms; direct mechanisms |
| JEL: | D82 D86 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2021-07&r= |
| By: | Berdud, M.; Jofre-Bonet, M.; Rodes-Sanchez, M.; Towse, A. |
| Abstract: | After the shock caused by the first wave of COVID-19, discovering vaccines against the virus and administering them quickly to the population became the utmost priority worldwide, especially once subsequent waves of COVID-19 were inevitable. Not only incentivising the research on vaccines and authorising them quickly, but managing optimally the portfolio of vaccine candidates and establishing an efficient distribution plan became paramount to the success of this instrument. In this context, in October 2020, the European parliamentary group Renew Europe commissioned OHE a study on the 'Key factors on how to procure, pay for, distribute, and use vaccines for COVID-19 - A European perspective'. The piece that we present here is the English translation of the report, which we finished in November 2020. The study discusses the need to incentivise the makers of the most promising vaccine candidates to do develop them and invest in their production capacity. We present the Phase III vaccines pipeline (as of November 2020) and the vaccines' technical differences, pros and cons. We introduce a vaccine classification system based on efficacy thresholds (or guardrails) and quality bands according to predefined Target Product Profiles (TPP) and support the concept of advanced purchase agreements to incentivise vaccines' production in the pipeline ex-ante regulatory approval. We establish that European-level coordination on contracting requires sending the right signals to developers on both volume contracting and pricing. In other words, to incentivise development, quality and investment in production capacity, contracts need to include pricing as part of a reward system. There is also a need to incorporate extended value-added elements into definitions of TPP levels and contracting processes, including pricing. This report outlines essential potential criteria for distributing doses between the European Member States, and highlights the need to inform the population for achieving the desired levels of vaccine uptake. |
| Keywords: | Value, Affordability, and Decision Making |
| JEL: | I1 |
| Date: | 2021–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:ohe:conrep:002344&r= |
| By: | Soumen Banerjee; Yi-Chun Chen; Yifei Sun |
| Abstract: | We study full implementation with hard evidence in a bounded environment. By invoking monetary transfers off the equilibrium, we show that a social choice function is Nash implementable in a direct revelation mechanism if and only if it satisfies the measurability condition proposed by Ben-Porath and Lipman (2012). Building on a novel classification of lies according to their refutability with evidence, the mechanism requires only two agents, accounts for mixed-strategy equilibria, accommodates evidentiary costs, and can also be modified to account for limited solvency of the agents. We also establish a necessary and sufficient condition on the evidence structure for renegotiation-proof bilateral contracts, based on the classification of lies. |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2105.12298&r= |
| By: | Patrick Reinwald; Stephan Leitner; Friederike Wall |
| Abstract: | Limited memory of decision-makers is often neglected in economic models, although it is reasonable to assume that it significantly influences the models' outcomes. The hidden-action model introduced by Holmstr\"om also includes this assumption. In delegation relationships between a principal and an agent, this model provides the optimal sharing rule for the outcome that optimizes both parties' utilities. This paper introduces an agent-based model of the hidden-action problem that includes limitations in the cognitive capacity of contracting parties. Our analysis mainly focuses on the sensitivity of the principal's and the agent's utilities to the relaxed assumptions. The results indicate that the agent's utility drops with limitations in the principal's cognitive capacity. Also, we find that the agent's cognitive capacity limitations affect neither his nor the principal's utility. Thus, the agent bears all adverse effects resulting from limitations in cognitive capacity. |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2105.12469&r= |