nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2022‒10‒24
three papers chosen by
Guillem Roig
University of Melbourne

  1. Gaussian Agency problems with memory and Linear Contracts By Eduardo Abi Jaber; Stéphane Villeneuve
  2. Foreclosure and tunneling with partial vertical ownership By Hunold, Matthias; Petrishcheva, Vasilisa
  3. Economies of scale versus the costs of bundling in the procurement of highway pavement replacement By Ridderstedt, Ivan; Nilsson, Jan-Eric

  1. By: Eduardo Abi Jaber (X - École polytechnique); Stéphane Villeneuve (TSE-R - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: Can a principal still offer optimal dynamic contracts that are linear in end-of-period outcomes when the agent controls a process that exhibits memory? We provide a positive answer by considering a general Gaussian setting where the output dynamics are not necessarily semi-martingales or Markov processes. We introduce a rich class of principal-agent models that encompasses dynamic agency models with memory. From the mathematical point of view, we develop a methodology to deal with the possible non-Markovianity and non-semimartingality of the control problem, which can no longer be directly solved by means of the usual Hamilton-Jacobi-Bellman equation. Our main contribution is to show that, for one-dimensional models, this setting always allows for optimal linear contracts in end-of-period observable outcomes with a deterministic optimal level of effort. In higher dimension, we show that linear contracts are still optimal when the effort cost function is radial and we quantify the gap between linear contracts and optimal contracts for more general quadratic costs of efforts.
    Date: 2022–09–21
  2. By: Hunold, Matthias; Petrishcheva, Vasilisa
    Abstract: We study the incentives of firms that hold partial vertical ownership to foreclose rivals. Compared to a full vertical merger, with partial ownership, a firm may obtain only part of the target's profit but may nevertheless be able to influence the target's strategy significantly. The target may be either a supplier or a customer, which opens the scope for either input foreclosure or customer foreclosure. We show that the incentives to foreclose can be higher, equal, or even lower with partial ownership than with a vertical merger, depending on how the protection of minority shareholders and transfer price regulations are specified.
    Keywords: Backward ownership,Entry deterrence,Foreclosure,Minority shareholdings,Partial ownership,Uniform pricing,Vertical integration
    JEL: G34 L22 L40
    Date: 2022
  3. By: Ridderstedt, Ivan (Swedish National Road & Transport Research Institute (VTI)); Nilsson, Jan-Eric (Swedish National Road & Transport Research Institute (VTI))
    Abstract: Although most public procurements involve decisions concerning bundling there is only a limited body of empirical research guiding policy on this matter. In this paper, we examine the cost effects of pure bundling in the competitive tendering of highway pavement replacement with hot-mix asphalt. For this we use linear regression on data from a comprehensive sample of such contracts procured by the Swedish infrastructure manager (IM) during the period 2012–2015. We find that bundling affects the procurer’s cost in multiple and partly counteracting ways. Our results show that economies of scale are strong but diminishing and counteracted by costs of bundling and bundling related factors. Overall, the findings support Swedish IM’s current design of bundles but also suggest that most of the contracts are still inefficiently small. Whilst not perfectly generalizable to other markets, the findings provide some support the increased promotion and use of bundling of small-scaled road rehabilitation projects in the US. Two main implications of the results are that bundling policy should emphasize proximity and similarity rather than whether work is small-scale and that the scope for efficient bundling should be accounted for when optimizing the timing of pavement replacement.
    Keywords: Public procurement; Efficiency; Bundling; Grouping; Highway; Road work
    JEL: H57 R42 R48
    Date: 2022–10–07

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