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on Contract Theory and Applications |
| By: | Andrea Bafundi (University of Padova); Riccardo Camboni (University of Padova); Edoardo Grillo (University of Padova); Paola Valbonesi (University of Padova) |
| Abstract: | This paper studies how severe weather events (SWEs) affect the awarding procedures of public procurement contracts. We draw on a large dataset of Italian public procurement tenders for the construction and the maintenance of buildings and roads in the period 2008-2021. We find that municipalities previously hit by SWEs during the execution of procurement works are more likely to adopt procurement procedures that give them discretion in the selection of participating firms. When the firm winning the contract has already worked with the municipality in the past, such discretion reduces the likelihood of time overruns in work completion. Relational contracts aimed at overcoming the contractual incompleteness caused by SWEs can explain the previous findings. In a simple theoretical setting, we show that the public buyer can reward firms that handled past SWEs well by selecting them as participants in future tenders. |
| Keywords: | Public procurement; relational contract; severe weather events |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0303&r=cta |
| By: | Antelo, Manel; Bru, Lluís |
| Abstract: | We study the licensing of a product innovation from an external innovator in a duopoly of firms that compete sequentially with each other through quantities or prices. We find that the innovation is only licensed to a single firm, regardless of market competition. However, both the licensee and contractual terms under quantity competition differ from those under price competition. In the first case, the innovation is licensed to the market-leading firm through a non-distorting contract, and in the second case, to the market-following firm by means of a two-part tariff (distorting) contract involving a per-unit royalty. |
| Keywords: | Product innovation, licensing, Stackelberg duopoly, quantity competition, price competition |
| JEL: | D43 D45 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:117542&r=cta |
| By: | Matthias Fahn; Nicolas Klein |
| Abstract: | We analyze a repeated principal-agent setting in which the principal cares about the agent’s verifiable effort as well as an extra profit that can be generated only if the agent is talented. The agent is overconfident about his talent and updates beliefs using Bayes’ rule. An exploitation contract in which the agent is only compensated for his effort if the extra profit materializes maximizes the principal’s profits. In this optimal contract, the agent's principal-expected compensation decreases over time and learning exacerbates his exploitation, unless he has been revealed to be talented. Therefore, the principal’s profits may increase with failures, and the agent may only be employed if his perceived talent is sufficiently low. As an application of these results, we analyse a firm’s optimal promotion policy, and show that promotion to a new job may optimally be based on the agent being successful in a previous job, even if the agent's talent across jobs is entirely uncorrelated. This provides a novel explanation for the so-called “Peter Principle”, for which Benson et al., 2019 have recently provided evidence in a setting with verifiable performance and highly confident workers. |
| Keywords: | overconfidence, experimentation, dynamic incentives, Peter Principle |
| JEL: | C73 D83 D86 D91 M51 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10481&r=cta |
| By: | Martin Brown (Study Center Gerzensee, University of St. Gallen); Jan Schmitz (Radboud University); Christian Zehnder (University of Lausanne) |
| Abstract: | We study the impact of pre-contractual communication on market outcomes when economic relationships are subject to hidden action. Our experiment is framed in a credit market context and borrowers (second movers) can communicate with lenders (first movers) prior to entering the credit relationship. Communication reduces moral hazard (strategic default) and increases trust (credit provision) in an environment where opportunistic behavior by borrowers is revealed ex-post to lenders. By contrast, in an environment where strategic defaults are hidden behind a veil of uncertainty, we find a substantially weaker impact of communication. Borrowers are more likely to renege on repayment promises when they can hide opportunistic behavior from lenders. As a consequence, lenders extend less credit to borrowers who promise to repay. Hidden action undermines the positive e ect of communication on market outcomes. Our findings have implications for the design of contracts and how to structure relationships with a risk of hidden action: for precontractual communication to unfold its full potential it needs to go hand-in-hand with post-contractual monitoring. |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:szg:worpap:2302&r=cta |
| By: | José Ignacio Rivero Wildemauwe (Université de Cergy-Pontoise, THEMA) |
| Abstract: | I study a bilateral trade setting with asymmetric information, where one side has all the bargaining power and makes a take-it-or-leave-it price offer. Both agents hold a certain degree of Kantian morality and thus care about what would have happened had their actions been adopted by their counterpart. In order to capture this, I implement a Veil-of-Ignorance approach, whereby players are uncertain about their role and are thus forced to submit strategies for both the case where they are the Buyer and the Seller. More precisely, in the first stage, both agents propose the price at which they would be willing to buy, while in a second stage they decide whether they would accept to sell at the offered price. Buyer and Seller roles are randomly assigned in the last stage. I consider adverse selection by assuming that the Seller is fully informed about the product’s quality, while the Buyer can only form an expectation about it. I show that when the degree of morality is low, the expected quality necessary to produce efficient equilibria is lower than that required by purely selfish agents and, moreover, it is decreasing in the intensity of the moral concern. I also find a threshold degree of morality above which only efficient equilibria are possible for any expectation about quality. Moral preferences thus mitigate the adverse selection problem and completely eliminate it when sufficiently strong. |
| Keywords: | bilateral trade; sequential; asymmetric information; homo moralis; Veil of Ignorance. |
| JEL: | D03 D82 D91 C78 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2023-11&r=cta |