nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2023‒01‒09
four papers chosen by
Guillem Roig
University of Melbourne

  1. Robust Contracts with Exploration By Chang Liu
  2. State-business relations and access to external financing By Tkachenko, Andrey
  3. Tournament-Style Political Competition and Local Protectionism: Theory and Evidence from China By Hanming Fang; Ming Li; Zenan Wu
  4. Adverse Selection and Network Design Under Regulated Plan Prices: Evidence from Medicaid By Amanda R. Kreider; Timothy J. Layton; Mark Shepard; Jacob Wallace

  1. By: Chang Liu
    Abstract: We study a two-period moral hazard problem; there are two agents, with identical action sets that are unknown to the principal. The principal contracts with each agent sequentially, and seeks to maximize the worst-case discounted sum of payoffs, where the worst case is over the possible action sets. The principal observes the action chosen by the first agent, and then offers a new contract to the second agent based on this knowledge, thus having the opportunity to explore in the first period. We characterize the principal's optimal payoff guarantee. Following nonlinear first-period contracts, optimal second-period contracts may also be nonlinear in some cases. Nonetheless, we find that linear contracts are optimal in both periods.
    Date: 2022–11
  2. 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 ftrms' access to debt using an extensive survey of Russian manufacturing ftrms 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 ftrms, although it is still positive and signiftcant for non-connected and small ftrms. The paper concludes that political connection does not entirely suppress the beneftcial access to debt that public contracts create.
    Keywords: public procurement,political connection,leverage,short-term debt,long-term debt,capital structure,Russia
    JEL: G18 G32 H57
    Date: 2022
  3. By: Hanming Fang (University of Pennsylvania); Ming Li (Chinese University of Hong Kong); Zenan Wu (Peking University)
    Abstract: We argue that inter-jurisdictional competition in a regionally decentralized authoritarian regime distorts local politicians’ incentives in resource allocation among firms from their own city and a competing city. We develop a tournament model of project selection that captures the driving forces of local protectionism. The model robustly predicts that the joint presence of regional spillover and the incentive for political competition leads to biased resource allocations against the competing regions. Combining several unique data sets, we test our model predictions in the context of government procurement allocation and firms’ equity investment across Chinese cities. We find that, first, when local politicians are in more intensive political competition, they allocate less government procurement contracts to firms in the competing city; second, local firms, especially local SOEs, internalize the local politicians’ career concerns and invest less in the competing cities. Our paper provides a political economy explanation for inefficient local protectionism in an autocracy incentivized by tournament-style political competition.
    Keywords: Political Competition; Local Protectionism; Government Procurement; Firm Investment
    JEL: H11 H70 P30
    Date: 2022–12–12
  4. By: Amanda R. Kreider; Timothy J. Layton; Mark Shepard; Jacob Wallace
    Abstract: Health plans for the poor increasingly limit access to specialty hospitals. We investigate the role of adverse selection in generating this equilibrium among private plans in Medicaid. Studying a network change, we find that covering a top cancer hospital causes severe adverse selection, increasing demand for a plan by 50% among enrollees with cancer versus no impact for others. Medicaid’s fixed insurer payments make offsetting this selection, and the contract distortions it induces, challenging, requiring either infeasibly high payment rates or near-perfect risk adjustment. By contrast, a small explicit bonus for covering the hospital is sufficient to make coverage profitable.
    JEL: H51 I11 I13
    Date: 2022–12

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