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on Contract Theory and Applications |
| By: | De Donder, Philippe; Leroux, Marie-Louise; Salanié, François |
| Abstract: | Advantageous (or propitious) selection occurs when an increase in the premium of an in- surance contract induces high-cost agents to quit, thereby reducing the average cost among remaining buyers. Hemenway (1990) and many subsequent contributions motivate its ad- vent by differences in risk-aversion among agents, implying different prevention efforts. We argue that it may also appear in the absence of moral hazard, when agents only differ in riskiness and not in (risk) preferences. We first show that profit-maximization implies that advantageous selection is more likely when markup rates and the elasticity of insurance demand are high. We then move to standard settings satisfying the single-crossing prop- erty and show that advantageous selection may occur when several contracts are offered, when agents also face a non-insurable background risk, or when agents face two mutually exclusive risks that are bundled together in a single insurance contract. We exemplify this last case with life care annuities, a product which bundles long-term care insurance and annuities, and we use Canadian survey data to provide an example of a contract facing advantageous selection. |
| Keywords: | Propitious selection; Positive or negative correlation property; Contract bundling; Long-term care insurance; Annuity |
| JEL: | D82 I13 |
| Date: | 2022–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:126901&r= |
| By: | Thomas Sampson |
| Abstract: | Firm-to-firm relationships in global value chains create opportunities for North-South technology diffusion. This paper studies technology transfer in value chains when contracts are incomplete and in-put production technologies are imperfectly excludable. The paper introduces a new taxonomy of value chains based on whether or not the headquarters firm benefits from imitation of its supplier's technology. In inclusive value chains, where imitation is beneficial, the headquarters firm promotes technology diffusion. By contrast, in exclusive value chains headquarters seeks to limit supplier imitation. The paper analyzes how this distinction affects the returns to offshoring, the welfare effects of technical change and the social efficiency of knowledge sharing. Weaker intellectual property rights over input production technologies raise welfare when value chains are inclusive, but have the opposite effect under exclusive value chains. |
| Keywords: | technology transfer, global value chains, incomplete contracts, intellectual property rights, imitation |
| Date: | 2022–12 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1826&r= |
| By: | Dominique Demougin; Carsten Helm |
| Abstract: | We analyze a multitasking model with a verifiable routine task and a skill-dependent activity characterized by moral hazard. Contracts negotiated by firm/employee pairs follow from Nash bargaining. High- and low-skilled employees specialize, intermediate productivity employees perform both tasks. Compared to the efficient solution, more employees exert both tasks and effort in the routine task is inefficiently large. As work overload in the routine task is decoupled from a corresponding increase in remuneration, employees perceive a loss of control to allocate effort between the two tasks. Reductions in employees’ bargaining power and improvements in monitoring technologies aggravate the issue. |
| Keywords: | multi-tasking, work overload, routine tasks, rent extraction, moral hazard, limited liability, Nash Bargaining |
| JEL: | D82 D86 J41 M52 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9753&r= |
| By: | Keeler Marku; Sergio Ocampo (University of Western Ontario); Jean-Baptiste Tondji (University of Texas Rio Grande Valley) |
| Abstract: | We consider a game between several principals and a common agent, where principals know only a subset of the agent’s available actions. Principals demand robustness and evaluate contracts on a worst-case basis. This robust approach allows for a crisp characterization of the equilibrium contracts and payoffs and provides a novel proof of equilibrium existence in common agency by constructing a pseudo-potential for the game. Robust contracts make explicit how the efficiency of the equilibrium outcome relative to collusion among principals depends on the principals’ ability to extract payments from the agent. |
| Keywords: | Common Agency, Robustness, Worst Case, Efficiency |
| JEL: | C72 D81 D86 H21 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:uwowop:20222&r= |
| By: | Philippe De Donder; Marie-Louise Leroux |
| Abstract: | Advantageous (or propitious) selection occurs when an increase in the premium of an insurance contract induces high-cost agents to quit, thereby reducing the average cost among remaining buyers. Hemenway (1990) and many subsequent contributions motivate its advent by differences in risk-aversion among agents, implying different prevention efforts. We argue that it may also appear in the absence of moral hazard, when agents only differ in riskiness and not in (risk) preferences. We first show that profit-maximization implies that advantageous selection is more likely when markup rates and the elasticity of insurance demand are high. We then move to standard settings satisfying the single-crossing property and show that advantageous selection may occur when several contracts are offered, when agents also face a non-insurable background risk, or when agents face two mutually exclusive risks that are bundled together in a single insurance contract. We exemplify this last case with life care annuities, a product which bundles long-term care insurance and annuities, and we use Canadian survey data to provide an example of a contract facing advantageous selection. To quote this document : De Donder P., Leroux M-L and Salanié F. (2022). Advantageous selection without moral hazard (with an application to life care annuities). (2022s-13, CIRANO). https://doi.org/10.54932/NQVT3458 La sélection avantageuse (ou propice) se produit lorsqu'une augmentation de la prime d'un contrat d'assurance incite les acteurs à coût élevé à démissionner, réduisant ainsi le coût moyen parmi les acheteurs restants. Hemenway (1990) et de nombreuses contributions ultérieures motivent son apparition par des différences d'aversion au risque entre les acteurs, impliquant des efforts de prévention différents. Nous soutenons que la sélection avantageuse peut également apparaître en l'absence d'aléa moral, lorsque les agents ne diffèrent que par leur niveau de risque et non par leurs préférences (en matière de risque). Nous montrons d'abord que la maximisation du profit implique que la sélection avantageuse est plus probable lorsque les taux de marge et l'élasticité de la demande d'assurance sont élevés. Nous étudions ensuite des environnements économiques standard dans lesquels la propriété de croisement unique est satisfaite et montrons que la sélection avantageuse peut se produire lorsque plusieurs contrats sont proposés, lorsque les acteurs sont également confrontés à un risque [supp : de fond] non assurable, ou lorsque les acteurs sont confrontés à deux risques mutuellement exclusifs qui sont regroupés dans un seul contrat d'assurance. Nous illustrons ce dernier cas avec [supp : les rentes viagères,] un produit qui regroupe l'assurance soins de longue durée et les rentes, et nous utilisons des données d'enquête canadiennes pour fournir un exemple de contrat faisant l'objet de sélection avantageuse. Pour citer ce document : De Donder P., Leroux M-L and Salanié F. (2022). Advantageous selection without moral hazard (with an application to life care annuities). (2022s-13, CIRANO). https://doi.org/10.54932/NQVT3458 |
| Keywords: | Propitious selection,positive or negative correlation property,contract bundling,long-term care insurance,annuity, Sélection propice,propriété de corrélation positive ou négative,regroupement de contrats,assurance soins de longue durée,rente |
| JEL: | D82 I13 |
| Date: | 2022–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2022s-13&r= |
| By: | Inderst, Roman; Griem, Fabian; Schaffer, Greg |
| Abstract: | In a model of contractual inefficiencies due to double-marginalization, we analyze the practice of tied rebates that incentivizes retailers to purchase multiple products from the same manufacturer. We isolate two opposing effects: a surplus-sharing effect that enhances efficiency and a rent-extraction effect that reduces efficiency. The overall effect is more likely to be negative when the manufacturer has a particularly strong brand for which the retailers alternatives are much inferior. Foreclosure of a more efficient provider of the manufacturers weaker product is not a sufficient condition for a welfare loss. Our key positive implication relates to the seemingly inefficient introduction of weaker products by the owners of particularly strong brands. |
| Keywords: | contractual inefficiencies,double-marginalization,competition,surplus-sharing effect,rent-extraction effect,efficiency,brand strength |
| JEL: | L14 D43 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:254324&r= |