nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2022‒03‒28
five papers chosen by
Guillem Roig
University of Melbourne

  1. Relative Performance Contracts versus Group Contracts with Hidden Savings By Archawa Paweenawat
  2. Dual Returns to Experience By Laura Hospido; Jose Garcia-Louzao; Alessandro Ruggier
  3. Tournaments with reserve performance By Mikhail Drugov; Dmitry Ryvkin; Jun Zhang
  4. Information Design in Concave Games By Alex Smolin; Takuro Yamashita
  5. Toward a reconciliation between external accountability requirement and the social sector: lessons from stewardship theory By Julie Rouault; Elisabeth Albertini

  1. By: Archawa Paweenawat
    Abstract: This paper studies the effects of hidden savings on the relative benefits of two optimal incentive contracts, namely, relative performance contracts and group contracts. As an analysis framework, this paper develops a dynamic moral hazard model in which agents can secretly save. The results from the model suggest that hidden savings affect relative performance contracts more than they affect group contracts. In addition, under group contracts, agents rely more on risk-sharing networks and less on own savings than they do under relative performance contracts. To test the model’s predictions, this paper uses a unique data set with detailed information on households’ characteristics, their choices of loans, and their responses to liquidity shocks. The empirical results confirm that, in the areas where hidden savings problem is likely to be more severe, households are more likely to choose group loans. In addition, the results also show that households with group loans rely more on networks to prevent themselves from future liquidity shocks.
    Keywords: Incentive contracts; Unobserved savings; Relative performance; Group lending; Microfinance
    JEL: D86 G21 G51
    Date: 2022–03
  2. By: Laura Hospido (Banco de Espana and IZA); Jose Garcia-Louzao (Bank of Lithuania and Vilnius University); Alessandro Ruggier (University of Nottingham)
    Abstract: In this paper we study how labor market duality affects human capital accumulation and wage trajectories of young workers. Using rich administrative data for Spain, we follow workers since their entry into the labor market to measure experience accumulated under different contractual arrangements and we estimate their wage returns. We document lower returns to experience accumulated in fixed-term contracts compared to permanent contracts and show that this difference is not due to unobserved firm heterogeneity or match quality. Instead, we provide evidence that the gap in returns is due to lower human capital accumulation while working under fixed-term contracts. This difference widens with worker ability, in line with skill-learning complementarity. Our results suggest that the widespread use of fixedterm work arrangements reduces skill acquisition of high-skilled workers, holding back life-cycle wage growth by up to 16 percentage points after 15 years since labor market entry.
    Keywords: labor market duality, human capital, earnings dynamics
    JEL: J30 J41 J63
    Date: 2022–02–15
  3. By: Mikhail Drugov (New Economic School and CEPR); Dmitry Ryvkin (Department of Economics, Florida State University); Jun Zhang (Economics Discipline Group, School of Business, University of Technology Sydney)
    Abstract: We study tournaments where winning a rank-dependent prize requires passing a reserve---a minimum performance standard. Agents' performance is determined by effort and noise. For log-concave noise distributions the optimal reserve is at the modal performance, and the optimal prize scheme is winner-take-all. In contrast, for log-convex noise distributions the optimal reserve is at the lower bound of the distribution of performance, which is passed with probability one in equilibrium, and it is optimal to award equal prizes to all qualifying agents. These pay schemes are optimal in a general class of symmetric monotone contracts that may depend on cardinal performance.
    Keywords: tournament, reserve performance, prize sharing
    JEL: C72 D72 D82
    Date: 2022–03
  4. By: Alex Smolin; Takuro Yamashita
    Abstract: We study information design in games with a continuum of actions such that the players' payoffs are concave in their own actions. A designer chooses an information structure--a joint distribution of a state and a private signal of each player. The information structure induces a Bayesian game and is evaluated according to the expected designer's payoff under the equilibrium play. We develop a method that facilitates the search for an optimal information structure, i.e., one that cannot be outperformed by any other information structure, however complex. We show an information structure is optimal whenever it induces the strategies that can be implemented by an incentive contract in a dual, principal-agent problem which aggregates marginal payoffs of the players in the original game. We use this result to establish the optimality of Gaussian information structures in settings with quadratic payoffs and a multivariate normally distributed state. We analyze the details of optimal structures in a differentiated Bertrand competition and in a prediction game.
    Date: 2022–02
  5. By: Julie Rouault (Sorbonne Graduate Business School - IAE Paris - Sorbonne Business School); Elisabeth Albertini (Sorbonne Graduate Business School - IAE Paris - Sorbonne Business School)
    Abstract: Not-for-profit organisations are increasingly being held to account for their social performance. Due to their resource dependency, they generally rely on external financial resources to ensure their missions. This alternative is usually coupled with social accountability requirements from private investors. Given their externally induced nature, social accountability initiatives might result in the implementation of management control systems imported from the for profit organisations without any real consideration of the social sector's characteristics and complexities, leading to an oversimplification of the social field reality. Relying on both agency and stewardship theories, we wonder how to reconcile external reporting obligations with the characteristics of not-for-profit organizations? To do so, we rely on a single qualitative case study of a social organization in charge of housing services which recently introduced a reporting system following external requirements from private investors. We stress the potential hazards resulting from the implementation of an agency theory - based system in a social context and maintain that accountability expected benefits are unlikely to be reached. We eventually develop recommendations to improve the actual device, focusing in particular on the elaboration of new metrics.
    Keywords: accountability requirement,not-for-profit,social sector accountability,social performance,pay-for-success contracts
    Date: 2022

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