nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2022‒10‒03
four papers chosen by
Guillem Roig
University of Melbourne

  1. Neoclassical Growth with Long-Term One-Sided Commitment Contracts By Dirk Krueger; Harald Uhlig
  2. Relational Contracts: Public versus Private Savings By Francesc Dilmé; Daniel Garrett
  3. Sharing cost of network among users with differentiated willingness to pay By Panova, Elena
  4. The Impact of Team Incentives on Performance in Graduate School: Evidence from Two Pilot RCTs By John A. List; Rohen Shah

  1. By: Dirk Krueger (University of Pennsylvania CEPR and NBER); Harald Uhlig (University of Chicago CEPR and NBER)
    Abstract: This paper characterizes the stationary equilibrium of a continuous-time neoclassical production economy with capital accumulation in which households can insure against idiosyncratic income risk through long-term insurance contracts. Insurance companies operating in perfectly competitive markets can commit to future contractual obligations, whereas households cannot. For the case in which household labor productivity takes two values, one of which is zero, and where households have logutility we provide a complete analytical characterization of the optimal consumption insurance contract, the stationary consumption distribution and the equilibrium aggregate capital stock and interest rate. Under parameter restrictions, there is a unique stationary equilibrium with partial consumption insurance and a stationary consumption distribution that takes a truncated Pareto form. The unique equilibrium interest rate (capital stock) is strictly decreasing (increasing) in income risk. The paper provides an analytically tractable alternative to the standard incomplete markets general equilibrium model developed in Aiyagari (1994) by retaining its physical structure, but substituting the assumed incomplete asset markets structure with one in which limits to consumption insurance emerge endogenously, as in Krueger and Uhlig (2006).
    Keywords: Idiosyncratic Risk, Limited Commitment, Stationary Equilibrium
    JEL: E21 D11 D91 G22
    Date: 2022–09–09
  2. By: Francesc Dilmé (University of Bonn); Daniel Garrett (University of Essex)
    Abstract: Work on relational employment agreements often predicts low payments or termination for poor performance. The possibility of saving can, however, limit the e˙ectiveness of mone-tary incentives in motivating an employee with diminishing marginal utility for consump-tion. We study the role of savings and their observability in optimal relational contracts. We focus on the case where players are not too patient, and hence the constant first-best e˙ort cannot be implemented. If savings are hidden, the relationship eventually deterio-rates over time. In particular, both payments and e˙ort decline. On the other hand, if savings are public, consumption is initially high, so the agent’s savings fall over time, and e˙ort and payments to the agent increase. The findings thus suggest how tacit agreements on consumption can forestall the deterioration of dynamic relationships in which the agent can save.
    Keywords: relational contracts, consumption smoothing preferences, private savings
    JEL: C73 J30
    Date: 2022–08
  3. By: Panova, Elena
    Abstract: We consider the problem of sharing the cost of efficient uncongested tree-network among users with differentiated willingness to pay for the good supplied through the network. We nd that the associated value sharing problem is convex, hence, the core is large and we axiomatize a new, computationally simple core selection based on the idea of proportionality.
    Keywords: sharing network cost; core; proportional allocation
    JEL: C71
    Date: 2022–09–06
  4. By: John A. List; Rohen Shah
    Abstract: In organizations, teams are ubiquitous. “Weakest Link” and “Best Shot” are incentive schemes that tie a group member’s compensation to the output of their group’s least and most productive member, respectively. In this paper, we test the impact of these incentive schemes by conducting two pilot RCTs (one in-person, one online), which included more than 250 graduate students in a graduate math class. Students were placed in study groups of three or four students, and then groups were randomized to either control, Weakest Link, or Best Shot incentives. We find evidence that such incentive approaches can affect test scores, both in-person and online.
    JEL: C9 C93 D79 I2 J3
    Date: 2022–08

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