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on Contract Theory and Applications |
| By: | Jeddi, Samir (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)); Lencz, Dominic (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)); Wildgrube, Theresa (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)) |
| Abstract: | Deep decarbonisation requires large-scale irreversible investments throughout the next decade. Policymakers discuss Carbon Contracts for Differences (CCfDs) to incentivise such investments in the industry sector. CCfDs are contracts between a regulator and a firm that pay out the difference between a guaranteed strike price and the actual carbon price per emission reduction generated by an investment of the firm. We develop an analytical model to assess the welfare effects of CCfDs and compare it to other carbon pricing regimes. In our model, a regulator can offer CCfDs to risk-averse firms that decide upon irreversible investments into an emission-free technology in the presence of risk. Risk can originate from the environmental damage or the variable costs of the emission-free technology. We find that a CCfD can be a beneficial policy instrument as it hedges firms’ risk encouraging investments when the firms’ risk aversion would otherwise inhibit this. In contrast to mitigating firms’ risk by committing to a carbon price early on, CCfDs maintain the regulator’s flexibility to adjust the carbon price if new information reveals. However, as CCfDs hedge the firms’ revenues, they might safeguard production with the emission-free technology, even if it is ex-post inefficient. In this case, regulatory flexibility can be welfare superior to offering a CCfD. |
| Keywords: | Climate policy; carbon pricing; risk; Carbon Contracts for Difference |
| JEL: | H23 L51 O31 Q55 Q58 |
| Date: | 2021–11–29 |
| URL: | http://d.repec.org/n?u=RePEc:ris:ewikln:2021_009&r= |
| By: | Gagan Aggarwal; Kshipra Bhawalkar; Guru Guruganesh; Andres Perlroth |
| Abstract: | We study the mechanism design problem of selling $k$ items to unit-demand buyers with private valuations for the items. A buyer either participates directly in the auction or is represented by an intermediary, who represents a subset of buyers. Our goal is to design robust mechanisms that are independent of the demand structure (i.e. how the buyers are partitioned across intermediaries), and perform well under a wide variety of possible contracts between intermediaries and buyers. We first study the case of $k$ identical items where each buyer draws its private valuation for an item i.i.d. from a known $\lambda$-regular distribution. We construct a robust mechanism that, independent of the demand structure and under certain conditions on the contracts between intermediaries and buyers, obtains a constant factor of the revenue that the mechanism designer could obtain had she known the buyers' valuations. In other words, our mechanism's expected revenue achieves a constant factor of the optimal welfare, regardless of the demand structure. Our mechanism is a simple posted-price mechanism that sets a take-it-or-leave-it per-item price that depends on $k$ and the total number of buyers, but does not depend on the demand structure or the downstream contracts. Next we generalize our result to the case when the items are not identical. We assume that the item valuations are separable. For this case, we design a mechanism that obtains at least a constant fraction of the optimal welfare, by using a menu of posted prices. This mechanism is also independent of the demand structure, but makes a relatively stronger assumption on the contracts between intermediaries and buyers, namely that each intermediary prefers outcomes with a higher sum of utilities of the subset of buyers represented by it. |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2111.10472&r= |
| By: | Bell, Brian; Pedemonte, Simone; Van Reenen, John |
| Abstract: | We exploit the large rise in relative performance awards in the United Kingdom over the last two decades to investigate whether these contracts improve the alignment between CEO pay and firm performance. We first document that corporate governance appears to be stronger when institutional ownership is greater. Then, using hand-collected data from annual reports on explicit contracts, we show that (1) CEO pay still responds more to increases in the firms' stock performance than to decreases, and, importantly, this asymmetry is stronger when corporate governance is weak as measured by low institutional ownership; and (2) "pay for luck"persists as remuneration increases with random positive shocks, even when the CEO has equity awards that explicitly condition on firm performance relative to peer firms in the same sector. A major reason why relative performance contracts do not eliminate pay for luck is that CEOs who fail to meet the terms of their past performance awards are able to obtain more generous new equity rewards in the future in weakly governed firms. We show the mechanism operates both through the quantum of shares and the structure of new contracts. These findings suggest that reforms to the formal structure of CEO pay contracts are unlikely to align incentives in the absence of strong corporate governance. |
| JEL: | N0 R14 J01 |
| Date: | 2021–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:112749&r= |
| By: | Shafik, Minouche |
| Abstract: | Capitalism needs a new social contract to better manage the consequences of technology and an increasingly diverse and flexible workforce. That social contract should retain the benefits of flexibility but do a better job of providing security in the form of mandatory benefits, putting a floor on incomes, and investing far more in helping workers adapt to economic shocks and rising automation. It also means a new deal with business that would achieve a more level playing field in how capital and labour are taxed. |
| Keywords: | capitalism; social contract; labour markets; taxation of capital; OUP deal |
| JEL: | P00 J08 I38 A13 |
| Date: | 2021–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:112213&r= |