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on Contract Theory and Applications |
| By: | Johannes Abeler; David Huffman; Collin Raymond; David B. Huffman |
| Abstract: | Using field and laboratory experiments, we demonstrate that the complexity of incentive schemes and worker bounded rationality can affect effort provision, by shrouding attributes of the incentives. In our setting, complexity leads workers to over-provide effort relative to a fully rational benchmark, and improves efficiency. We identify contract features, and facets of worker cognitive ability, that matter for shrouding. We find that even relatively small degrees of shrouding can cause large shifts in behavior. Our results illustrate important implications of complexity for designing and regulating workplace incentive contracts. |
| Keywords: | complexity, bounded rationality, shrouded attribute, Ratchet effect, dynamic incentives, field experiments |
| JEL: | D80 D90 J20 J30 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10541&r=cta |
| By: | Guillermo Alonso Alvarez; Sergey Nadtochiy |
| Abstract: | In this paper we show how the relaxation techniques can be used to establish the existence of an optimal contract in presence of information asymmetry. The method we illustrate was initially motivated by the problem of designing optimal brokerage fees, but it does apply to other optimal contract problems, in which (i) the agent controls linearly the drift of a diffusion process, (ii) the direct dependence of the principal's and the agent's objectives on the strategy of the agent is of a special form, and (iii) the space of admissible contracts is compact. This method is then applied to establish existence of an optimal brokerage fee in a market model with a private trading signal observed by the broker's client but not by the broker. |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2307.07010&r=cta |
| By: | Kris De Jaegher; Michal Soltes; Vitezslav Titl |
| Abstract: | Public procurement contracts are necessarily incomplete and require frequent ex-post renegotiation. In this paper we first develop a stylized theoretical model of the effects of renegotiation policies on firms’ bidding strategies and, consequently, on the winning bids and final prices of contracts. We then use a Czech policy reform to empirically test the model’s predictions. Our findings show that (i) eased renegotiation rules lead to a decrease in the average winning bids; however, (ii) average final prices of contracts remain at the pre-reform level as the extra renegotiated price compensates for the drop in winning bids. We do not find convincing evidence of a decrease in productivity of the winning firms, but we do provide suggestive evidence of a change of contract allocation towards firms with higher bargaining power. |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp757&r=cta |
| By: | Rosina Rodríguez Olivera |
| Abstract: | I consider a model in which a monopolist data-seller offers information to privately informed data-buyers who play a game of incomplete information. I characterize the data-seller's optimal menu, which screens between two types of data-buyers. Data-buyers' preferences for information cannot generally be ordered across types. I show that the nature of data-buyers' preferences for information allows the data-seller to extract all surplus. In particular, the data-seller offers a perfectly informative experiment , which makes the data-buyer with the highest willingness to pay and a partially informative experiment, which makes the data-buyer with the highest willingness to pay for perfect information indifferent between both experiments. I also show that the features of the optimal menu are determined by the interaction between data-buyers' strategic incentives and the correlation of their private information. Namely, the data-seller offers two informative experiments even when data-buyers would choose the same action without supplemental information if data-buyers: i) have coordination incentives and their private information is negatively correlated or ii) have anti-coordination incentives and their private information is positively correlated. |
| Keywords: | Screening, Information, Strategic incentives |
| JEL: | D80 D82 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_442&r=cta |
| By: | Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University) |
| Abstract: | Based on a horizontal product differentiation model associated with network externalities, we consider the impact of compatibility (interconnectivity) on incentives to innovate in a network goods industry in the cases of Cournot quantity and Bertrand price duopoly. We demonstrate that the effect of compatibility on incentives to innovate depends on network externalities and product substitutability. In particular, an increase in the degree of compatibility increases the incentives to innovate if the degree of network externalities is relatively large and if the degree of product differentiation is sufficiently large, irrespective of the mode of competition. Then, we then examine the same problem in a Hotelling-type unit-linear market and show that an increase in the degree of compatibility reduces the incentives to innovate. |
| Keywords: | innovation; network externality; compatibility; a fulfilled expectation; cost-reducing |
| JEL: | D43 L13 L15 O31 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:253&r=cta |