nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2022‒11‒21
four papers chosen by
Guillem Roig
University of Melbourne

  1. State-business relations and access to external financing By Tkachenko, Andrey
  2. Optimal Intermediary Contracts By Nabi Arjmandi; Chao Gu; Joseph H. Haslag
  3. Foreclosure and Tunneling with Partial Vertical Ownership By Matthias Hunold; Vasilisa Petrishcheva
  4. Equilibrium (non-)Existence in Games with Competing Principals By Andrea Attar; Eloisa Campioni; Gwenaël Piaser

  1. By: Tkachenko, Andrey
    Abstract: Firms' contractual relations with a state may give lenders a positive signal and facilitate access to debt. This paper studies the impact of public procurement contracts on firms' access to debt using an extensive survey of Russian manufacturing firms combined with accounting and procurement data. It shows that earnings from state-to-business contracts increase the short-term debt twice as much as revenue from private contracts. Long-term debt is not affected by public contracts differently compared to private contracts. The debt sensitivity to public contracts is four times larger for politically connected firms, although it is still positive and significant for non-connected and small firms. The paper concludes that political connection does not entirely suppress the beneficial access to debt that public contracts create.
    JEL: G18 G32 H57
    Date: 2022–10–25
  2. By: Nabi Arjmandi (Department of Economics, University of Missouri-Columbia); Chao Gu (Department of Economics, University of Missouri-Columbia); Joseph H. Haslag (Department of Economics, University of Missouri-Columbia)
    Abstract: Financial intermediaries simultaneously engage in two separate relationships: they accept deposits and they make loans. Yet, researchers have focused either on deposit contracts or loan contracts. In this paper, we develop a theory in which deposit contracts and loan contracts are determined in equilibrium. Borrowers have limited commitment and the banks have access to a direct, safe long-term investment. We then study how changes in the borrower’s creditworthiness affects deposit and loan contracts. We study this relationship across different trading protocols. With deteriorating credit conditions, we find that loan rates can decline (declining spreads) and loan quantities can increase. This is the opposite direction used when constructing things like credit indicators. This relationship is not robust to changes in market structures. Lastly, we show how an aggregate fundamental shock can induce bank runs. However, the bank run is less likely in the worst credit-condition category.
    Keywords: deposit contracts, loan contracts, credit conditions, financial indicators
    JEL: D53 E44 G21
    Date: 2022–11
  3. By: Matthias Hunold (University of Siegen); Vasilisa Petrishcheva (University of Potsdam)
    Abstract: We demonstrate how the incentives of firms that partially own their suppliers or customers to foreclose rivals depend on how the partial owner can extract profits from the target (tunneling). Compared to a fully vertically integrated firm, a partial owner may obtain only a share of the target’s profit but influence the target’s strategy significantly. We show that the incentives for customer and input foreclosure 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 affect the scope for profit extraction.
    Keywords: Backward ownership, Entry deterrence, Foreclosure, Minority shareholdings, Partial ownership, Uniform pricing, Vertical integration
    JEL: G34 L22 L40
    Date: 2022–11
  4. By: Andrea Attar (CNRS - Centre National de la Recherche Scientifique, TSM - Toulouse School of Management Research - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - CNRS - Centre National de la Recherche Scientifique - TSM - Toulouse School of Management - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées); Eloisa Campioni; Gwenaël Piaser
    Abstract: We study competing-mechanism games, in which multiple principals contract with multiple agents. We reconsider the issue of non-existence of an equilibrium as first raised by Myerson (1982). In the context of his example, we establish the existence of a perfect Bayesian equilibrium. We clarify that Myerson (1982)'s non-existence result is an implication of the additional requirement he imposes, that each principal selects his preferred continuation equilibrium in the agents' game.
    Keywords: Competing Mechanisms,Equilibrium Existence
    Date: 2022–09–28

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