nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2023‒08‒28
three papers chosen by
Guillem Roig, University of Melbourne

  1. Indicator Choice in Pay-for-Performance By Majid Mahzoon; Ali Shourideh; Ariel Zetlin-Jones
  2. Contracting with Heterogeneous Researchers By Han Wang
  3. Unraveling Coordination Problems By Roweno J. R. K. Heijmans

  1. By: Majid Mahzoon; Ali Shourideh; Ariel Zetlin-Jones
    Abstract: We study the classic principal-agent model when the signal observed by the principal is chosen by the agent. We fully characterize the optimal information structure from an agent's perspective in a general moral hazard setting with limited liability. Due to endogeneity of the contract chosen by the principal, the agent's choice of information is non-trivial. We show that the agent's problem can be mapped into a geometrical game between the principal and the agent in the space of likelihood ratios. We use this representation result to show that coarse contracts are sufficient: The agent can achieve her best with binary signals. Additionally, we can characterize conditions under which the agent is able to extract the entire surplus and implement the first-best efficient allocation. Finally, we show that when effort and performance are one-dimensional, under a general class of models, threshold signals are optimal. Our theory can thus provide a rationale for coarseness of contracts based on the bargaining power of the agent in negotiations.
    Date: 2023–07
  2. By: Han Wang
    Abstract: We study the design of contracts that incentivize a researcher to conduct a costly experiment, extending the work of Yoder (2022) from binary states to a general state space. The cost is private information of the researcher. When the experiment is observable, we find the optimal contract and show that higher types choose more costly experiments, but not necessarily more Blackwell informative ones. When only the experiment result is observable, the principal can still achieve the same optimal outcome if and only if a certain monotonicity condition with respect to types holds. Our analysis demonstrates that the general case is qualitatively different than the binary one, but that the contracting problem remains tractable.
    Date: 2023–07
  3. By: Roweno J. R. K. Heijmans
    Abstract: This paper studies policy design in coordination problems. In coordination games, a subsidy raises player $i$'s incentive to play the subsidized action. This raises $j$'s incentive to play the same action, which further incentivizes $i$, and so on. Building upon this ``unraveling effect'', we characterize the subsidies that implement a given outcome of the game as its unique equilibrium. Among other properties, we establish that subsidies are: (i) symmetric for identical players; (ii) globally continuous in model parameters; (iii) increasing in opportunity costs; and (iv) decreasing in spillovers. Applications of the model include joint investment problems, participation decisions, and principal-agent contracting.
    Date: 2023–07

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