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on Contract Theory and Applications |
| By: | Ferey, Antoine (LMU Munich and CESifo); Haufler, Andreas (LMU Munich and CESifo); Perroni, Carlo (University of Warwick and CESifo) |
| Abstract: | We offer a new explanation for why taxes have become less redistributive in many countries in parallel with an increase in income concentration. When performance-based contracts are needed to incentivize effort, redistribution through progressive income taxes becomes less precisely targeted. Taxation reduces after-tax income inequality but undermines performance-based contracts, lowering effort and raising pre-tax income differentials. Product market integration can widen the spread of project returns and make contract choices more responsive to changes in the level of taxation, resulting in a lower optimal income tax rate even when individuals are not inter-jurisdictionally mobile. |
| Keywords: | performance contracts; market integration; redistributive taxation; |
| JEL: | D63 F15 H21 |
| Date: | 2022–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:335&r= |
| By: | Vitor Farinha Luz |
| Abstract: | I analyze long-term contracting in insurance markets with asymmetric information. The buyer privately observes her risk type, which evolves stochastically over time. A long-term contract specifies a menu of insurance policies, contingent on the history of type reports and contractable accident information. The optimal contract offers the consumer in each period a choice between a perpetual complete coverage policy with fixed premium and a risky continuation contract in which current period's accidents may affect not only within-period consumption (partial coverage) but also future policies. The model allows for arbitrary restrictions to the extent to which firms can use accident information in pricing. In the absence of pricing restrictions, accidents as well as choices of partial coverage are used in the efficient provision of incentives. If firms are unable to use accident history, longer periods of partial coverage choices are rewarded, leading to menus with cheaper full-coverage options and more attractive partial-coverage options; and allocative inefficiency decreases along all histories. These results are used to study a model of perfect competition, where the equilibrium is unique whenever it exists, as well as the monopoly problem, where necessary and sufficient conditions for the presence of information rents are given. |
| Date: | 2022–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2208.14560&r= |
| By: | Huiyi Guo; Wei He; Bin Liu |
| Abstract: | We study the revenue-maximizing mechanism when a buyer's value evolves endogenously because of learning-by-consuming. A seller sells one unit of a divisible good, while the buyer relies on his private, rough valuation to choose his first-stage consumption level. Consuming more leads to a more precise valuation estimate, after which the buyer determines the second-stage consumption level. The optimum is a menu of try-and-decide contracts, consisting of a first-stage price-quantity pair and a second-stage per-unit price for the remaining quantity. In equilibrium, a higher first-stage valuation buyer pays more for higher first-stage consumption and enjoys a lower second-stage per-unit price. Methodologically, we deal with the difficulty that due to the failure of single-crossing condition, monotonicity in allocation plus the envelope condition is insufficient for incentive compatibility. Our results help to understand contracts about sequential consumption with the learning feature; e.g., leasing contracts for experience goods and trial sessions for certain courses. |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2209.01453&r= |