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on Contract Theory and Applications |
| By: | Krueger, Dirk; Uhlig, Harald |
| 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 log-utility 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: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:698&r=cta |
| By: | Cole, Harold L.; Krueger, Dirk; Mailath, George J.; Park, Yena |
| Abstract: | We analyze efficient risk-sharing arrangements when the value from deviating is determined endogenously by another risk sharing arrangement. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the original coalition and any coalition formed (joined) after deviations rely on a belief in future cooperation which we term "trust". We treat the contracting conditions of original and deviation coalitions symmetrically and show that higher trust tightens incentive constraints since it facilitates the formation of deviating coalitions. As a consequence, although trust facilitates the initial formation of coalitions, the extent of risk sharing in successfully formed coalitions is declining in the extent of trust and efficient allocations might feature resource burning or utility burning: trust is indeed a double-edged sword. |
| Keywords: | Coalitions, Limited Enforcement, Risk Sharing |
| JEL: | E21 G22 D11 D91 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:697&r=cta |
| By: | Billimoria, F.; Simshauser, P. |
| Abstract: | Challenges to the term financing of standalone storage in energy-only electricity markets relate to the difficulty of obtaining long-tenor contracts given multiple volatile revenue streams. Government and central agency-initiated contracting and procurement of storage has garnered interest as a means of catalysing adoption and learning curve effects, particularly given the required scale and pace of the decarbonisation objective. Given the complexity of storage operations and multiple streams of value, standard contract forms are yet to emerge. While there is flexibility in the design of forward contract arrangements, flow on effects of design on incentive compatibility in dispatch, risk-trading and investment represent a critically important avenue of investigation. This article establishes six principles for government-initiated contracting and examines the incentive compatibility of storage contract designs. We find that that preferences for structural simplicity in contract design could introduce incentive incompatibility without careful consideration of the interactions between storage operations and investment. |
| Keywords: | Electricity markets, risk trading, project finance, renewables, energy storage |
| Date: | 2023–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2322&r=cta |
| By: | Camilo Hern\'andez; Dylan Possama\"i |
| Abstract: | This paper investigates the moral hazard problem in finite horizon with both continuous and lump-sum payments, involving a time-inconsistent sophisticated agent and a standard utility maximiser principal. Building upon the so-called dynamic programming approach in Cvitani\'c, Possama\"i, and Touzi [18] and the recently available results in Hern\'andez and Possama\"i [43], we present a methodology that covers the previous contracting problem. Our main contribution consists in a characterisation of the moral hazard problem faced by the principal. In particular, it shows that under relatively mild technical conditions on the data of the problem, the supremum of the principal's expected utility over a smaller restricted family of contracts is equal to the supremum over all feasible contracts. Nevertheless, this characterisation yields, as far as we know, a novel class of control problems that involve the control of a forward Volterra equation via Volterra-type controls, and infinite-dimensional stochastic target constraints. Despite the inherent challenges associated to such a problem, we study the solution under three different specifications of utility functions for both the agent and the principal, and draw qualitative implications from the form of the optimal contract. The general case remains the subject of future research. |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2303.01601&r=cta |
| By: | Ayca Kaya (University of Miami); Santanu Roy (Southern Methodist University) |
| Abstract: | We analyze the effect of transparency of past trading volumes in markets where an informed long-lived seller can repeatedly trade with short-lived uninformed buyers. Transparency allows buyers to observe previously sold quantities. In markets with intra-period monopsony (single buyer each period), transparency reduces welfare if the ex-ante expected quality is low, but improves welfare if the expected quality is high. The effect is reversed in markets with intra-period competition (multiple buyers each period). This discrepancy in the efficiency implications of transparency is explained by how buyer competition affects the seller's ability to capture rents, which, in turn, influences market screening. |
| Keywords: | Repeated sales, adverse selection, transparency, competition, market efficiency |
| JEL: | D82 C73 D61 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:smu:ecowpa:2301&r=cta |
| By: | Liwen Wang (SAFTI - Shenzhen Audencia Financial Technology Institute) |
| Abstract: | Purpose – Contracts and trust are two prominent governance mechanisms in buyer-supplier exchanges, yet controversy persists regarding the interplay between contracts and trust. This study provides a new perspective to understand the debate by differentiating between- from within-dyad effects of contracts–trust relationships. Design/methodology/approach – Based on survey data of 250 Chinese buyer–supplier relationships collected over two time periods, we employed two-level hierarchical linear modeling (HLM) with repeated measures to test the influence of contracts (trust) on trust (contracts) over time. Findings – We find that for major buyer–supplier exchanges, contracts and trust tend to complement each other when comparing across dyads, but they likely substitute for each other in within-dyad settings. Research limitations/implication – First, to illustrate the dynamic interactions between contracts and trust, we collected data at two time periods and assumed continuous linear relationships of time with both contracts and trust. Further research should collect multiple waves of data to explore the complex, varying changes that arise over time. Second, our findings are based on buyer–supplier relationships in China, whose unique cultural features may limit the generalizability of the results to other settings. Practical implications – Channel managers can structure exchanges by devising detailed contracts that align incentives and demonstrate commitment, which helps build trust in a relationship. Channel managers should also pay special attention to the contingency effects of their transactional and relational features. Originality – This study offers the first explicit test of the dynamic contracts–trust relationship, thereby establishing a more refined understanding of interplay between contracts and trust. |
| Keywords: | trust, contracts, buyer–supplier exchanges, asset specificity, exchange history |
| Date: | 2023–01–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03944358&r=cta |
| By: | Lotti, Clarissa; Muço, Arieda; SPAGNOLO, GIANCARLO; Valletti, Tommaso |
| Abstract: | Centralization of public procurement can lower prices for the government’s direct purchase of goods and services. This paper focuses on indirect savings. Public administrations that do not procure directly through a central procurement agency might benefit from the availability of centrally-procured goods. We exploit the introduction of a central purchasing agency in Italy and find that prices decreased by 22% among administrations that bought autonomously. These indirect effects appear to be driven by informational externalities, especially for less competent public buyers purchasing technologically more complex goods. Accounting for indirect savings increases the estimate of direct ones. |
| Date: | 2023–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:c678u&r=cta |