nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2022‒06‒13
four papers chosen by
Guillem Roig
University of Melbourne

  1. Present Bias in the Labor Market – When it Pays to be Naive By Matthias Fahn; Regina Seibel
  2. Personalized Pricing and Competition By Rhodes, Andrew; Zhou, Jidong
  3. Collective Hold-Up By Matias Iaryczower; Santiago Oliveros
  4. A Class of Behavioral Models for the Profit-Maximizing Firm By Philippe Choné; Laurent Linnemer

  1. By: Matthias Fahn; Regina Seibel (University of Zurich)
    Abstract: We study optimal employment contracts for present-biased employees if firms cannot commit to long-term contracts. Assuming that an employee’s effort increases his chances to obtain a future benefit, we show that individuals who are naive about their present bias will actually be better off than sophisticated or time-consistent individuals. Moreover, firms might benefit from being ignorant about the extent of an employee’s naivet´e. Our results also indicate that naive employees might be harmed by policies such as employment protection or a minimum wage, whereas sophisticated employees are better off.
    Keywords: Present bias, labor markets, on-the-job search, moral hazard
    JEL: D21 D90 J31 J32
    Date: 2022–04
  2. By: Rhodes, Andrew; Zhou, Jidong
    Abstract: We study personalized pricing (or first-degree price discrimination) in a general oligopoly model. In the short-run, when the market structure is fixed, the impact of personalized pricing hinges on the degree of market coverage (i.e., how many consumers buy). If coverage is high (e.g., because the production cost is low, or the number of firms is large), personalized pricing intensifies competition and so harms firms but benefits consumers, whereas the opposite is true if coverage is low. However in the long-run, when the market structure is endogenous, personalized pricing always benefits consumers because it induces the socially optimal level of firm entry. We also study the asymmetric case where some firms can use consumer data to price discriminate while others cannot, and show it can be worse for consumers than when either all or no firms can personalize prices.
    Keywords: personalized pricing, competition, price discrimination, consumer data
    JEL: D43 D82 L13
    Date: 2022–05
  3. By: Matias Iaryczower; Santiago Oliveros
    Abstract: We consider dynamic processes of coalition formation in which a principal bargains sequentially with a group of agents. This problem is at the core of a variety of applications in economics and politics, including a lobbyist seeking to pass a bill, an entrepreneur setting up a start-up, or a firm seeking the approval of corrupt bureaucrats. We show that when the principal’s willingness to pay is high, strengthening the bargaining position of the agents generates delay and reduces agents’ welfare. This occurs in spite of the lack of informational asymmetries or discriminatory offers. When this collective action problem is severe enough, agents prefer to give up considerable bargaining power in favor of the principal.
    JEL: C78 D7 D71 D72
    Date: 2022–04
  4. By: Philippe Choné; Laurent Linnemer
    Abstract: We study the behavior of a firm that consistently maximizes a misspecified profit function. We provide an equilibrium concept where the misspecification error remains undetected. We examine the uniqueness and stability of the equilibria. The model of the price-taking firm belongs to this class. In one of these models, the cost-taking firm, the equilibrium price increases with fixed costs. The behavioural price can be lower or higher than the rational price, meaning consumers can benefit from the lack of rationality. Finally in a long-run perspective where the cost is endogenous, we show that the behavioral and rational firms end with the same level of output.
    Keywords: behavioural model of a firm, misspecified profit function, fixed costs
    JEL: L12 L21 L23 L25 M41
    Date: 2022

This nep-cta issue is ©2022 by Guillem Roig. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.