nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2021‒07‒19
seven papers chosen by
Guillem Roig
University of Melbourne

  1. Banking and Inside Money: Revisiting the Efficiency of Deposit Contracts By David Rivero; Hugo Rodríguez Mendizábal
  2. Collaborative Insurance Sustainability and Network Structure By Arthur Charpentier; Lariosse Kouakou; Matthias L\"owe; Philipp Ratz; Franck Vermet
  3. Optimal tariffs with emissions taxes under non-restrictive two-part licensing strategies by a foreign eco-competitor By Kim, Seung-Leul; Lee, Sang-Ho
  4. Effects of incentive framing on performance and effort: evidence from a medically framed experiment By Lagarde, Mylène; Blaauw, Duane
  5. Limited intelligence and performance-based compensation: An agent-based model of the hidden action problem By Patrick Reinwald; Stephan Leitner; Friederike Wall
  6. Can personalized pricing be a winning strategy in oligopolistic markets with heterogeneous demand customers? Yes, it can. By Rosa-Branca Esteves
  7. Reduced-Form Allocations for Multiple Indivisible Objects under Constraints By Xu Lang; Zaifu Yang

  1. By: David Rivero; Hugo Rodríguez Mendizábal
    Abstract: In this paper we show that nominal demand-deposits are not, in general, Pareto optimal contracts. We construct a variation of the ? model where inside money is essential. In this setting, we show that the interplay between non-contingent deposit contracts and price flexibility is not a sufficient mechanism to provide efficient risk-sharing. Furthermore, state-contingent deposit contracts are not incentive compatible and implementing them would require banks to gather specific information regarding customer preferences that is beyond the scope of current depository institutions.
    Keywords: deposit contracts, risk-sharing, money creation, state contingencies
    JEL: G21 E42
    Date: 2021–07
  2. By: Arthur Charpentier; Lariosse Kouakou; Matthias L\"owe; Philipp Ratz; Franck Vermet
    Abstract: The peer-to-peer (P2P) economy has been growing with the advent of the Internet, with well known brands such as Uber or Airbnb being examples thereof. In the insurance sector the approach is still in its infancy, but some companies have started to explore P2P-based collaborative insurance products (eg. Lemonade in the U.S. or Inspeer in France). The actuarial literature only recently started to consider those risk sharing mechanisms, as in Denuit and Robert (2021) or Feng et al. (2021). In this paper, describe and analyse such a P2P product, with some reciprocal risk sharing contracts. Here, we consider the case where policyholders still have an insurance contract, but the first self-insurance layer, below the deductible, can be shared with friends. We study the impact of the shape of the network (through the distribution of degrees) on the risk reduction. We consider also some optimal setting of the reciprocal commitments, and discuss the introduction of contracts with friends of friends to mitigate some possible drawbacks of having people without enough connections to exchange risks.
    Date: 2021–07
  3. By: Kim, Seung-Leul; Lee, Sang-Ho
    Abstract: This study considers eco-technology licensing strategy by a foreign innovator that competes with a polluting domestic firm in the home country. We examine and compare the two-part licensing contracts with and without non-negative constraints on the royalty or a fixed fee. We find that the licensor may choose either negative royalty or negative fixed fee, depending on the levels of emissions tax and tariff. We then examine the government’s optimal tariff policies under the emissions tax and demonstrate that allowing a non-restrictive two-part licensing contract is better for domestic welfare than a restrictive licensing contract. We also reveal that the tariffs under the two-part licensing have a negative relationship with emissions taxes, but the tariff with non-restrictive licensing is higher than that with restrictive licensing.
    Keywords: Eco-technology; tariff policies; emissions tax; non-restrictive two-part licensing; foreign innovated firm
    JEL: D45 H23 L13
    Date: 2021–06
  4. By: Lagarde, Mylène; Blaauw, Duane
    Abstract: We study the effects on performance of incentives framed as gains or losses, as well as the effort channels through which individuals increase performance. We also explore potential spill-over effects on a non-incentivised activity. Subjects participated in a medically framed real-effort task under one of the three contracts, varying the type of performance incentive received: (1) no incentive; (2) incentive framed as a gain; or (3) incentive framed as a loss. We find that performance improved similarly with incentives framed as losses or gains. However, individuals increase performance differently under the two frames: potential losses increase participants’ performance through a greater attention (fewer mistakes), while bonuses increase the time spent on the rewarded activity. There is no spill-over effect, either negative or positive, on the non-incentivised activity. We discuss the meaning and implications of our results for the design of performance contracts.
    Keywords: penalties; rewards; laboratory experiment; prosocial motivation; intrinsic motivation; Springer deal
    JEL: C91 D64 I11
    Date: 2021–06–20
  5. By: Patrick Reinwald; Stephan Leitner; Friederike Wall
    Abstract: Models of economic decision makers often include idealized assumptions, such as rationality, perfect foresight, and access to all relevant pieces of information. These assumptions often assure the models' internal validity, but, at the same time, might limit the models' power to explain empirical phenomena. This paper is particularly concerned with the model of the hidden action problem, which proposes an optimal performance-based sharing rule for situations in which a principal assigns a task to an agent, and the action taken to carry out this task is not observable by the principal. We follow the agentization approach and introduce an agent-based version of the hidden action problem, in which some of the idealized assumptions about the principal and the agent are relaxed so that they only have limited information access, are endowed with the ability to gain information, and store it in and retrieve it from their (limited) memory. We follow an evolutionary approach and analyze how the principal's and the agent's decisions affect the sharing rule, task performance, and their utility over time. The results indicate that the optimal sharing rule does not emerge. The principal's utility is relatively robust to variations in intelligence, while the agent's utility is highly sensitive to limitations in intelligence. The principal's behavior appears to be driven by opportunism, as she withholds a premium from the agent to assure the optimal utility for herself.
    Date: 2021–07
  6. By: Rosa-Branca Esteves (NIPE and Economics Department, University of Minho)
    Abstract: This paper aims to understand under what market conditions, can competing symmetric fi rms employ personalized pricing as a winning strategy. A key departure of our paper from the literature is that we introduce customer heterogeneity in demand. If fi rms´data discloses only vertical information (demand heterogeneity), fi rms can only employ group pricing. This is always a winning strategy. When data discloses horizontal information (consumer preferences) and vertical information, perfect personalized pricing (PPP) becomes feasible. If data only discloses horizontal information, fi rms can only employ imperfect personalized pricing (IPP). By comparing uniform pricing (UP) with personalized pricing, we show that if the share of high demand customers in the market is greater than the share of low demand consumers, fi rms are always better off with no discrimination. More importantly, we show that if heterogeneity in purchase quantity is sufficiently high, then personalized pricing can be a winning strategy for all symmetric practice fi rms. If heterogeneity in consumer value is high and the share of high demand consumers is sufficiently low, in comparison to UP, both firms are better off under IPP. For an intermediate share of high demand consumers, firms can get higher profi ts under PPP than under UP and IPP.
    JEL: D43 D80 L13 L40
    Date: 2021
  7. By: Xu Lang; Zaifu Yang
    Abstract: We examine the implementation of reduced-form allocation rules that assign multiple indivisible objects to many agents, with incomplete information and distributional constraints across objects and agents. To obtain implementability results, we adopt a lift-and-project approach, which reduces the problem to a problem of enumerating finite generators of a projection cone. We study geometric and combinatorial properties of the projection cone and provide a total unimodularity condition that leads to several characterization results including those on hierarchies and bihierarchies. Our results have applications in matching markets with constraints where agents may have ordinal or cardinal preferences.
    Keywords: Implementation, Reduced-form rules, Indivisible goods, Distributional constraints, Total unimodularity, Incomplete information.
    JEL: D44 C65
    Date: 2021–07

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