nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2022‒04‒04
four papers chosen by
Guillem Roig
University of Melbourne

  1. Competition under incomplete contracts and the design of procurement policies By Rodrigo Carril; Andres Gonzalez-Lira; Michael S. Walker
  2. Alternative Work Arrangements and Worker Outcomes: Evidence from Payrolling By Bas Scheer; Wiljan van den Berge; Maarten Goos; Alan Manning; Anna Salomons
  3. Selling to a principal and a budget-constrained agent By Debasis Mishra; Kolagani Paramahamsa
  4. Incentivizing irreversible investment By Livdan, Dmitry; Nezlobin, Alexander

  1. By: Rodrigo Carril; Andres Gonzalez-Lira; Michael S. Walker
    Abstract: We study the effects of intensifying competition for contracts in the context of U.S. Defense procurement. Conceptually, opening contracts up to bids by more participants leads to lower awarding prices, but may hinder buyers' control over non-contractible characteristics of prospective contractors. Leveraging a regulation that mandates agencies to publicize certain contract opportunities, we document that expanding the set of bidders reduces award prices, but deteriorates post-award performance, resulting in more cost overruns and delays. To further study the scope of this tension, we develop and estimate a model in which the buyer endogenously chooses the intensity of competition, invited sellers decide on auction participation and bidding, and the winner executes the contract ex-post. Model estimates indicate substantial heterogeneity in ex-post performance across contractors, and show that simple adjustments to the current regulation that account for adverse selection could provide 2 percent of savings in procurement spending, or $104 million annually
    Keywords: Procurement, competition, auctions, incomplete contracts
    JEL: D22 D44 D73 H57 L13 L14
    Date: 2022–03
  2. By: Bas Scheer (CPB Netherlands Bureau for Economic Policy Analysis); Wiljan van den Berge (CPB Netherlands Bureau for Economic Policy Analysis); Maarten Goos; Alan Manning; Anna Salomons
    Abstract: The rising incidence of alternative work arrangements raises questions about worker outcomes in non-standard labor contracts. However, causal evidence on the effects of flexible contracts on labor market outcomes of individual workers is scarce. We study this question using data on payrolling, a work arrangement where employees are on the payroll of one company while performing their job duties at another firm. Like employment agencies, payroll companies can offer flexible employment contracts. Payrolling is a growing phenomenon on the Dutch labor market, and is particularly prevalent in low-wage jobs in the service sector. We show that employees who receive a payrolling contract subsequently have a reduced chance of employment, a lower incidence of permanent contracts, lower pension contributions, and lower growth in hourly wages. Some of this effect disappears in the three years after payrolling as employees switch jobs. These findings are based on payrolling prior to the 2020 enactment of new labor law in the Netherlands (Wet Arbeidsmarkt in Balans WAB). This law equates the legal protection of employees on payrolling contracts to that of standard contracts, including pension accrual. Future research could consider whether adverse effects for individual employees have indeed been remedied since the introduction of this law.
    JEL: J31 J32 J41 J42
    Date: 2022–03
  3. By: Debasis Mishra; Kolagani Paramahamsa
    Abstract: We analyze a model of selling a single object to a principal-agent pair who want to acquire the object for a firm. The principal and the agent have different assessments of the object's value to the firm. The agent is budget-constrained while the principal is not. The agent participates in the mechanism, but she can (strategically) delegate decision-making to the principal. We derive the revenue-maximizing mechanism in a two-dimensional type space (values of the agent and the principal). We show that below a threshold budget, a mechanism involving two posted prices and three outcomes (one of which involves randomization) is the optimal mechanism for the seller. Otherwise, a single posted price mechanism is optimal.
    Date: 2022–02
  4. By: Livdan, Dmitry; Nezlobin, Alexander
    Abstract: Existing dynamic investment models that show that a manager can be incentivized to implement the optimal investment policy rely on the assumption that the firm is operating in an ever-expanding product market. This paper presents an analytically tractable, discrete-time, neoclassical model with irreversible investment and the possibility of unfavorable demand events. We show that even when the principal is uninformed about changes in demand for the firm’s output, there exists a performance measurement system that leads to goal congruent investment incentives for the manager. If the principal can observe the unfavorable demand events, then goal congruence can be achieved using very simple accrual accounting rules, such as straight-line depreciation.
    Keywords: iIrreversible investment; goal congruence; performance measurement; residual income
    JEL: M40
    Date: 2022–03–01

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