nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2021‒10‒18
five papers chosen by
Guillem Roig
University of Melbourne

  1. Defending home against giants: Exclusive dealing as a survival strategy for local firms By Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
  2. Moral Hazard with Heterogeneous Beliefs By Martin Dumav; Urmee Khan; Luca Rigotti
  3. Exclusive contracts and multihoming agents in two-sided markets By Saruta, Fuyuki
  4. Generalized Cumulative Offer Processes By Inacio Bo; Jorgen Kratz; Makoto Shimoji
  5. A reassessment of the potential for loss-framed incentive contracts to increase productivity: a meta-analysis and a real-effort experiment By Paul J. Ferraro; J. Dustin Tracy

  1. By: Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
    Abstract: We consider exclusive contracts a survival strategy for a local incumbent manufacturer facing a multinational manufacturer's entry. Although both manufacturers prefer to trade with an efficient local distributor, trading with inefficient competitive distributors is acceptable only to the entrant, because of the entrant's efficiency. Hence, such competitive distributors can be an outside option for the entrant. As the entrant becomes efficient, the outside option works effectively, implying that the entry does not considerably benefit the efficient local distributor. Thus, the local manufacturer is more likely to sign an exclusive contract with the efficient distributor as the entrant becomes efficient.
    Date: 2021–03
  2. By: Martin Dumav; Urmee Khan; Luca Rigotti
    Abstract: We study a model of moral hazard with heterogeneous beliefs where each of agent's actions gives rise to a pair of probability distributions over output levels, one representing the beliefs of the agent and the other those of the principal. The agent's relative optimism or pessimism dictates whether the contract is high-powered (i.e. with high variability between wage levels) or low-powered. When the agent is sufficiently more optimistic than the principal, the trade-off between risk-sharing and incentive provision may be eliminated. Using Monotone Likelihood Ratio ranking to model disagreement in the parties' beliefs, we show that incentives move in the direction of increasing disagreement. In general, the shape of the wage scheme is sensitive to the differences in beliefs. Thereby, key features of optimal incentive contracts under common beliefs do not readily generalize to the case of belief heterogeneity.
    Date: 2021–10
  3. By: Saruta, Fuyuki
    Abstract: We investigate a two-sided market model in which two platforms compete for sellers and buyers who can participate in multiple platforms (multihoming), and one of the two platforms can make exclusive contracts with sellers. The platform faces a trade-off when it enters into exclusivity agreements with sellers, which gives it an advantage when competing for buyers but reduces its revenue from the seller side. In addition, we expect that the existence of multihoming buyers weakens the platform's incentive to have an exclusive contract with sellers. Even when buyers can multihome, does a platform have an incentive to make exclusive contracts with sellers? If so, how does exclusive dealing affect social welfare? We obtain the following results. First, in equilibrium, the platform makes exclusive contracts with all sellers or not at all. If sellers' network externality on buyers is sufficiently large (small), it chooses fully exclusive dealing (nonexclusive dealing). Second, exclusive dealing is preferable (detrimental) to social welfare when the network externality is sufficiently large (small). Exclusive dealing encourages the multihoming of buyers, which allows agents to have more interactions on one platform and prompts more buyers to obtain stand-alone benefits from multiple platforms.
    Keywords: Exclusive contracts; Two-sided markets; Multihoming; Platform competition.
    JEL: D43 D62 L13 L14
    Date: 2021–10
  4. By: Inacio Bo; Jorgen Kratz; Makoto Shimoji
    Abstract: In the context of the matching-with-contracts model, we generalize the cumulative offer process to allow for arbitrary subsets of doctors to make proposals in each round. We show that, under a condition on the hospitals' choice functions, the outcome of this generalized cumulative offer process is independent of the sets of doctors making proposals in each round. The flexibility of the resulting model allows it to be used to describe different dynamic processes and their final outcomes
    Keywords: Matching with contracts, cumulative offer mechanism, asynchrony, order independence.
    JEL: C78 D44 D47
    Date: 2021–10
  5. By: Paul J. Ferraro (arey Business School & Whiting School of Engineering, Johns Hopkins University); J. Dustin Tracy (Economic Science Institute, Chapman University)
    Abstract: Behavioral scientists have reported substantial increases in worker productivity when incentives are framed as losses rather than gains. Loss-framed incentive contracts have also been reported to be preferred by workers. These claims are challenged by results from our meta-analysis and real-effort experiment. Whereas the summary effect size from loss-framed contracts in laboratory experiments is a 0.4 SD increase in productivity, the summary effect size from ï¬ eld experiments is 0.0 SD. Although this difference may reflect differing labor environments in the laboratory and ï¬ eld, we detect evidence of publication biases among laboratory experiments. In a new laboratory experiment that addresses prior design weaknesses, we estimate an effect size of 0.1 SD. This result, in combination with evidence from the meta-analysis, suggests that the difference between the effect size estimates in published laboratory and ï¬ eld experiments does not stem from the limited external validity of laboratory experiments, but may instead stem from a mix of underpowered laboratory designs and publication biases. Moreover, in our experiment, most workers preferred the gain-framed contract and the increase in average productivity is only detectable in the subgroup of workers (∼20%) who preferred the loss-framed contracts. This result suggests that employers may ï¬ nd using these contracts in real labor environments challenging. Based on the results from our experiment and meta-analysis, we believe that further research is warranted to assess the robustness and magnitude of the impacts from loss-framed contracts before advocating for their adoption by private and public sector actors.
    Keywords: framing effects, incentive contracts, meta-analysis, real-effort experiment, and behavioral insights
    JEL: C91 J24 J33
    Date: 2021

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