nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2022‒08‒22
four papers chosen by
Guillem Roig
University of Melbourne

  1. Trust and contracts: Empirical evidence By D'Acunto, Francesco; Xie, Jin; Yao, Jiaquan
  2. Alternative Forms of Buyer Power in a Vertical Duopoly: Implications for profits and consumer welfare By Aditya Bhattacharjea; Srishti Gupta
  3. Selling to a principal and a budget-constrained agent By Debasis Mishra; Kolagani Paramahamsa
  4. Land tenure and conservation adoption: An analysis of contracts and incentives By Burnett, Wesley; Szmurlo, Daniel; Callahan, Scott

  1. By: D'Acunto, Francesco; Xie, Jin; Yao, Jiaquan
    Abstract: Trust between parties should drive contract design: if parties were suspicious about each others' reaction to unplanned events, they might agree to pay higher costs of negotiation ex ante to complete contracts. Using a unique sample of U.S. consulting contracts and a negative shock to trust between shareholders/managers (principals) and consultants (agents) staggered across space and over time, we find that lower trust increases contract completeness. Not only the complexity but also the verifiable states of the world covered by contracts increase after trust drops. The results hold for several novel text-analysis-based measures of contract completeness and do not arise in falsification tests. At the clause level, we find that non-compete agreements, confidentiality, indemnification, and termination rules are the most likely clauses added to contracts after a negative shock to trust and these additions are not driven by new boilerplate contract templates. These clauses are those whose presence should be sensitive to the mutual trust between principals and agents.
    Keywords: Empirical Contract Theory,Incomplete Contracts,Cultural Economics,Beliefs and Choice,Personnel Economics,Organizational Economics,FinTech andTextual Analysis,Consulting,Management,Non-Compete Agreements,Big Five,Fraud,Accounting,Disclosure
    JEL: D86 D91 J33 L14 Z10
    Date: 2022
  2. By: Aditya Bhattacharjea (Department of Economics, Delhi School of Economics); Srishti Gupta (Department of Economics, Delhi School of Economics)
    Abstract: We derive several variations of a model in which two upstream firms supply a differentiated product to two downstream firms under exclusive contracts of different kinds. We first derive a benchmark model with upstream first-mover pricing. We then compare its outcomes with four other types of vertical arrangements representing different modes of exploiting buyer power: downstream first mover pricing; Nash bargaining, alternatively with linear and two-part tariffs; and vertical integration. In each case, we show how the equilibrium values of wholesale and retail prices as well as downstream firms’ profits are affected by changes in the exogenous parameters (degree of product differentiation, bargaining power, and production costs). We evaluate the various vertical regimes from the perspective of downstream firms’ profits as well as consumer welfare, and show how more powerful downstream firms can benefit consumers by exercising “countervailing power” against upstream firms. Key Words: Buyer power, Bertrand duopoly, Vertical contracts, Nash bargaining, Vertical integration. JEL Codes: D43, L13, L22
    Date: 2022–07
  3. By: Debasis Mishra (Indian Statistical Institute, Delhi); Kolagani Paramahamsa (Indian Statistical Institute, Delhi)
    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) approach the principal for decision-making. 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.
    Keywords: budget constraint, posted price, multidimensional mechanisms, behavioral mechanism design
    JEL: D82
    Date: 2022–07
  4. By: Burnett, Wesley; Szmurlo, Daniel; Callahan, Scott
    Keywords: Agricultural Finance, Agricultural and Food Policy, Institutional and Behavioral Economics
    Date: 2022–08

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