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on Contract Theory and Applications |
| By: | Philippe De Donder; Marie-Louise Leroux; François Salanié |
| 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. |
| Keywords: | propitious selection, positive or negative correlation property, contract bundling, long-term care insurance, annuity |
| JEL: | D82 I13 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9764&r= |
| By: | Monteiro, Diogo Souza |
| Abstract: | Contract farming is increasingly used to coordinate transactions between farmers and buyers downstream in food chains. However, the potential gains of contracts are often undermined by contract breaches from both buyers and sellers. In this paper we develop a simple buyer-seller contract model where we introduce the option of buyers to choose whether or not to offer a binding price to sellers. We assume agents are rational and self-interested, and that in single or double moral hazard settings there should not be differences in profits between buyers and sellers. We test our model in a laboratory experiment where we vary whether: (i) only the seller can renege on the initial agreement (single moral hazard), (ii) both the buyer and the seller can renege (double moral hazard), (iii) buyers can choose whether they are bound by their initial contract offer or not when the contract is determined. In contrast to theoretical predictions, we find that the single moral hazard setting is Pareto superior to the double moral hazard one, as it increases total profits and reduces income inequality. In the third treatment, we find that buyers opt to retain the right to renege on the initial contract offer and use it as a substitute for a lower price offer. |
| Keywords: | Agricultural Finance, Farm Management |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aesc22:321179&r= |
| By: | Macchiavello, Rocco; Morjaria, Ameet |
| Abstract: | Broadly speaking, economists have studied trust in two somewhat distinct ways. One approach is best captured by notions of generalized trust; another approach places trust at the core of relational contracts. After reviewing two empirical approaches to the study of relational contracts, we provide a preliminary attempt to bridge these two strands of the literature in the context of Rwanda’s coffee supply chain. |
| Keywords: | Relational Contracts; Trust; ERC Consolidator Grant Sharing Gains; IGC; EDI; GPRL at Northwestern; Elsevier deal |
| JEL: | J1 R14 J01 |
| Date: | 2022–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:115069&r= |
| By: | Martha Alter Chen; Sophie Plagerson; Laura Alfers |
| Abstract: | This paper makes the case that current social contracts are often inadequate, irrelevant, or unjust for informal workers. It outlines three possible future scenarios: the bad old contract, an even worse contract, and a better new contract. Under the bad old contract, informal workers lacked legal recognition, were stigmatized and penalized, and were excluded as partners. The intensification of predatory capitalism, repressive state policies and the collusion of state and capital, in the wake of the COVID-19 pandemic recession, makes the possibility of a worse new deal all too real. |
| Keywords: | Informal work, Informal economy, Social contract, State, Capital |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp-2022-49&r= |
| By: | Paltseva, Elena (Stockholm Institute of Transition Economics); Toews , Gerhard (New Economic School); Troya-Martinez, Marta (New Economic School) |
| Abstract: | Contracts between governments and international firms are difficult to enforce, especially under weak institutions: governments are tempted to renegotiate tax payments after investments occurred. Theoretically, such a hold-up problem is solved by using self-enforcing agreements that increase the value of sustaining the relationship over time. By delaying production, tax payments and investments, firm’s threat to terminate following a renegotiation becomes more effective. Using rich proprietary data on the oil and gas industry, we show that contracts between the oil majors and petro-rich economies with weak institutions are indeed delayed relative to countries with strong institutions. To push for a causal interpretation, we show that this backloading in countries with weak institutions only emerges in early 1970s. We attribute this to a change in the international view towards countries’ sovereignty over natural resources brought by the postwar weakning of the OECD countries. This new world order made it politically difficult for developed countries to continue the established practice of military interventions to back up the enforcement of the contracts of their oil firms. Fading of (military) enforcement, together with the absence of local legal enforcement, triggered the need to backload the contracts. |
| Keywords: | Dynamic Incentives; Political Economy; Institutions; Oil |
| JEL: | D02 D86 H20 L14 P48 Q30 |
| Date: | 2022–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hasite:0059&r= |
| By: | Franz Ostrizek |
| Abstract: | We study a dynamic principal-agent setting in which both sides learn about the importance of effort. The quality of the agent’s output is not observed directly. Instead, the principal jointly designs an evaluation technology and a wage schedule. More precise performance evaluation reduces current agency costs but promotes learning, which is shown to increase future agency costs. As a result, the optimal evaluation technology is both imprecise and tough: a bad performance is always sanctioned, but a good one is not always recognized. We also study the case in which principal and agent have different priors, for instance because the agent is overconfident. Then, the principal uses a tough evaluation structure to preserve the agent’s profitable misperception. For an underconfident agent, by contrast, she either uses a fully informative evaluation in order to promote learning and eliminate costly underconfidence, or is lenient if learning is too costly. |
| Keywords: | Moral Hazard, Performance Evaluation, Learning, Information Design |
| JEL: | D86 D83 M50 |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2022_358&r= |
| By: | Viral V. Acharya; Cecilia Parlatore; Suresh Sundaresan |
| Abstract: | We examine the optimal financing of infrastructure when governments have limited financial commitment and can expropriate rents from private sector firms that manage infrastructure. While private firms need incentives to implement projects well, governments need incentives to limit expropriation. This double moral hazard limits the willingness of outside investors to fund infrastructure projects. Optimal financing involves government guarantees to investors against project failure to incentivize the government to commit not to expropriate which improves private sector incentives and project quality. The model captures several other features prevalent in infrastructure financing such as government co-investment, tax subsidies, development rights, and cross-guarantees. |
| JEL: | D82 G30 G32 G38 H20 H41 H44 |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30131&r= |
| By: | Eichhorn, Theresa; Kantelhardt, Jochen; Schaller, Lena Luise |
| Abstract: | A major focus of the Europe’s “Green Deal” is the better delivery of public goods by agriculture. Improvements are expected by applying innovative agri-environmental contracts, e.g. based on results-based payments. For the implementation of such contract solutions, farmers’ willingness to participate is key to success. This empirical study determines factors influencing farmers’ intention to perform result-based contract solutions based on a Technology Acceptance Model (TAM). The direct and indirect relationships are tested by applying a Structural Equation Model (SEM) based on primary data of 235 Austrian farmers. Findings reveal that the intention to perform is significantly and directly driven by the attitude towards performing result-based contracts and by self-efficacy. Perceived usefulness and perceived ease of use are indirectly influencing the intention to perform via attitude. The subjective norm is influencing perceived usefulness directly and the intention to perform indirectly. Perceived risk is impacting perceived ease of use and therefore also indirectly impacting intention to perform. Our findings show, that especially for new voluntary AES, the socio-psychological constructs of farmers should be considered, which allows new levers in the design and successful introduction of these measures. |
| Keywords: | Agricultural and Food Policy, Agricultural Finance, Environmental Economics and Policy |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aesc22:321178&r= |