nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2022‒02‒21
five papers chosen by
Guillem Roig
University of Melbourne

  1. Combinable products, price discrimination, and collusion By Döpper, Hendrik; Rasch, Alexander
  2. Neural calibration of hidden inhomogeneous Markov chains -- Information decompression in life insurance By Mark Kiermayer; Christian Wei{\ss}
  4. Firms in (Green) Public Procurement: Financial strength indicators’ impact on contract awards and its repercussion on financial strength By Christopher F Baum; Arash Kordestani; Dorothea Schäfer; Andreas Stephan
  5. Market Impact of Small Orders By Oleh Danyliv

  1. By: Döpper, Hendrik; Rasch, Alexander
    Abstract: We analyze the effect of different pricing schemes on horizontally differentiated firms' ability to sustain collusion when customers have the possibility to combine (or mix) products to achieve a better match of their preferences. To this end, we compare two-part tariffs with linear prices and quantity-independent fixed fees in two different scenarios. First, we consider exogenously determined pricing schedules such as in the case of legal or third-party restrictions. We find that the additional price component of the two-part tariff makes it more difficult to sustain collusion. Additionally, the pricing schedule that is most beneficial for customers in absence of collusion harms customers most in presence of (partial) collusion. Second, we consider the scenario in which firms endogenously choose collusive tariffs. We find that firms can commit to using only the fixed price component of the two-part tariff to facilitate collusion at maximum prices. However, once we consider partial collusion, firms prefer to use both price components of the two-part tariffs. We discuss policy implications in the context of the media and entertainment industry.
    Keywords: Collusion,Combinable products,Media markets,Mixing,Price discrimination,Two-part tariff
    JEL: D43 L13 L41 L82
    Date: 2022
  2. By: Mark Kiermayer; Christian Wei{\ss}
    Abstract: Markov chains play a key role in a vast number of areas, including life insurance mathematics. Standard actuarial quantities as the premium value can be interpreted as compressed, lossy information about the underlying Markov process. We introduce a method to reconstruct the underlying Markov chain given collective information of a portfolio of contracts. Our neural architecture explainably characterizes the process by explicitly providing one-step transition probabilities. Further, we provide an intrinsic, economic model validation to inspect the quality of the information decompression. Lastly, our methodology is successfully tested for a realistic data set of German term life insurance contracts.
    Date: 2022–01
  3. By: Hitoshi Matsushima (Department of Economics, University of Tokyo)
    Abstract: This study investigates free-rider problems in long-term relationships, where each player seeks loopholes to impose the burden of cooperation on other players. The players establish a committee that demands that each player select an action as promised by a preset commitment rule, contingent on all players’ pre-play announcements. We require the committee to protect player sovereignty in that no player is forced to carry out high cooperation levels against their will or receive future retaliation from the other players for their low commitment. We demonstrate a method called the cautious commitment rule, according to which the committee makes each player a promise that is not necessarily the same as, but always close to and not greater than, their announced upper limit. We show that by adopting this rule, the committee can solve the free-rider problem while adhering to sovereignty protection and rule sustainability. As an application, we investigate global warming and show that adopting the cautious commitment rule is crucial for solving the tragedy of the global commons that all countries in the world have long faced.
    Date: 2022–01
  4. By: Christopher F Baum (Boston College; DIW Berlin); Arash Kordestani (Södertörn University); Dorothea Schäfer (DIW Berlin; Jönköping International Business School); Andreas Stephan (Linnaeus University; DIW Berlin)
    Abstract: We examine whether the financial strength of companies, in particular, small and medium-sized enterprises (SMEs) is causally linked to the award of a public procurement contract (PP), especially in the environmentally friendly “green” area (GPP). For this purpose, we build a combined procurement company data set from the Tenders Electronic Daily (TED) and the SME database AMADEUS, which includes ten European countries. First, we apply probit models to investigate whether the probability of winning the public tender depends on the company's financial strength. We then use the flexpanel DiD approach to investigate the question of whether the award has an impact on the future financial strength of the successful company. On the one hand, we find that a lower equity ratio and a higher short-term debt ratio increase the probability of being successful in a public tender. On the other hand, the success means that the companies can continue to work after the award with a lower equity ratio than comparable companies without an award, regardless of whether the company was successful in a traditional or a “green” public tender. We conclude from this that the success in a PP is a substitute for one's own financial strength and thus facilitates access to external financing. The estimation results differ depending on whether public procurement in general or the sub-group of sustainable public procurement is examined.
    Keywords: public procurement, green investment, public authorities, European Union
    JEL: H42 H44 C54
    Date: 2022–01–24
  5. By: Oleh Danyliv
    Abstract: The article is an empirical study of market impact through order book events. It describes a mechanism of extracting an average participation rate and a market impact of small orders which represent individual slices of large metaorders. The study is based on tick data for futures contracts. It is shown that the impact could be either linear or a concave function as a function of trading volume, depending on the instrument. After normalisation, this dependency is shown to be very similar for a wide range of instruments. A simple yet effective model for market impact estimation is proposed. This model is linear in nature and is derived based on straightforward microstructure reasoning. The estimation shows satisfactory results for both concave and linear market impact volume dependencies.
    Date: 2022–01

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