nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2022‒05‒02
four papers chosen by
Guillem Roig
University of Melbourne

  1. Bilateral Contracts and Social Welfare By Zo\"e Hitzig; Benjamin Niswonger
  2. Policy choices and outcomes for the competitive procurement of offshore wind energy globally By Malte Jansen; Philipp Beiter; Iegor Riepin; Felix M\"usgens; Victor Juarez Guajardo-Fajardo; Iain Staffell; Bernard Bulder; Lena Kitzing
  3. Are We Building Too Much Natural Gas Pipeline? A comparison of actual US expansion of pipeline to an optimized plan of the interstate network By Thuy Doan; Matthias Fripp; Michael J. Roberts
  4. Why Do Temporary Workers Have Higher Disability Insurance Risks Than Permanent Workers? By Koning, Pierre; Muller, Paul; Prudon, Roger

  1. By: Zo\"e Hitzig; Benjamin Niswonger
    Abstract: This paper defines and analyzes default delegation, an indirect mechanism that describes how the government influences bilateral contracts to maximize social welfare. In default delegation, the government chooses the default contract and a possibly-limited set of contract terms it is willing to enforce. Our analysis of this mechanism provides a theoretical foundation for immutable and default rules in contract law: immutable rules mitigate externalities, while default rules achieve particular distributions of surplus in non-contractible states of the world. We derive conditions under which default delegation implements the entire set of first-best contracts. We then characterize how optimal default delegation responds to changes in the underlying contracting environment and in the social welfare function's weighting of efficiency, externalities and distributional concerns.
    Date: 2022–03
  2. By: Malte Jansen; Philipp Beiter; Iegor Riepin; Felix M\"usgens; Victor Juarez Guajardo-Fajardo; Iain Staffell; Bernard Bulder; Lena Kitzing
    Abstract: Offshore wind energy is rapidly expanding, facilitated largely by competitive procurement schemes (such as auctions) run by governments. We provide a detailed quantified overview of these schemes, including geographical spread, volumes, results, and design specifications. Our comprehensive global dataset reveals that procurement schemes are designed heterogeneously. Although most remuneration schemes provide some form of revenue stabilisation, their policy design varies and includes feed-in tariffs, one-sided and two-sided contracts for difference, mandated power purchase agreements, and mandated renewable energy certificates. We review the schemes used in eight jurisdictions across Europe, Asia, and North America and evaluate the bids in their jurisdictional context. We comment on whether bids are reportedly cost competitive, the likeliness of timely construction, whether strategic bidding may have been involved, and other jurisdictional aspects that might have influenced the procurement results. We find that offshore wind energy farms in different jurisdictions and over time are exposed to market price risks to a varying extent, with less mature markets tending toward lower-risk schemes. Our data confirm a coincidence of declining procurement costs and growing diffusion of competitive procurement regimes.
    Date: 2022–02
  3. By: Thuy Doan (UHERO and Department of Economics, University of Hawai'i at Manoa); Matthias Fripp (UHERO); Michael J. Roberts (UHERO and Department of Economics, University of Hawai'i at Manoa)
    Abstract: Interstate natural gas transmission and storage infrastructure is facilitated using regulated, private transactions. Pipeline companies obtain long-term contracts from producers and wholesale purchasers, typically local distribution companies (LDCs). Historically, the Federal Energy Regulatory Commission (FERC) accepted these counterparty contracts as sufficient justification of need. Typically the LDCs are themselves regulated firms, which sometimes possess affiliations with pipeline companies. But with contracted costs largely passed through to retail customers via regulated prices, it is unclear whether contracting parties face sufficient competition or otherwise possess an incentive to find least-cost alternatives. To aid evaluation of past and future investments, we develop a national-level optimization model that can assess the need for new interstate pipeline and storage facilities. The model takes production and demand pathways as fixed and minimizes the infrastructure and operation costs of transport and storage in order to balance supply and demand on each day in each state. Transport of gas can be achieved using pipeline transmission of dry gas, or using truck or ship transport of liquefied natural gas (LNG), and optimal placement of liquefaction and gasification facilities. The model also accounts for international imports and exports of both dry gas and LNG. Three underground drygas storage facilities are considered, as well as LNG storage. We compare the model’s optimized plan with observed outcomes as the sector grew rapidly with hydraulic fracturing. We find that the U.S. has built 38 percent more pipeline and 27 percent more underground storage than necessary, amounting to roughly $179 billion in excess investment. It would have been more economic to expand pipeline far less than observed and instead satisfy critical-peak demands for gas using LNG, plus necessary liquefaction and gasification facilities. Differences between optimized and observed investments vary across the interstate network, while flows between states and into and out of storage bear a close resemblance to observed outcomes.
    Keywords: C61, L52, Q49
    Date: 2022–04
  4. By: Koning, Pierre (Vrije Universiteit Amsterdam); Muller, Paul (Vrije Universiteit Amsterdam); Prudon, Roger (Free University Amsterdam)
    Abstract: Workers with fixed-term contracts typically have worse health than workers with permanent contracts. We show that these differences in health translate into a substantially higher (30%) risk of applying for disability insurance (DI) in the Netherlands. Using unique administrative data on health and labor market outcomes of all employees in the Netherlands, we decompose this differential into: (i) selection of workers types into fixed-term contracts; (ii) the causal impact of temporary work conditions on worker health; (iii) the impact of differential employer incentives to reintegrate ill workers; and (iv) the differential impact of labor market prospects on the decision to apply for DI benefits. We find that selection actually masks part of the DI risk premium, whereas the causal impact of temporary work conditions on worker health is limited. At the same time, the differences in employer commitment during illness and differences in labor market prospects between fixed-term and permanent workers jointly explain more than 80% of the higher DI risk.
    Keywords: disability insurance, temporary work, employer incentives, worker health
    JEL: J08 I1 J22 H53
    Date: 2022–03

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