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on Contract Theory and Applications |
| By: | Richard Chisik (Department of Economics, Toronto Metropolitan University, Toronto, Canada); Chuyi Fang (Department of Economics and Finance, Sydney Institute of Language and Commerce, Shanghai University, Shanghai, 201800, China) |
| Abstract: | Although politicians and the popular press often express the desire to link retaliation in trade agreements to non-trade issues, the WTO discourages and usually disallows cross-retaliation even among its own agreements. In this paper we analyze the welfare implications of cross-retaliation. We compare two different mechanisms in a two-country two-sector tariff-setting political-economy model with incomplete information. In a same-sector retaliation mechanism a safeguard action, or other limited violation of the international trade agreement, is punished by an equivalent suspension of concessions in the sector where the initial deviation takes place. In a linked, or cross-sector, retaliation mechanism, retaliatory actions may be taken in another sector or agreement. We next consider less-than-equivalent suspensions of concessions whereby the probability of retaliation is less than unity. We then endogenize this probability and derive its optimal level separately for same- and cross-sector retaliation. We also consider the long-run viability of these self-enforcing trade agreements. We show that whether retaliation is certain or probabilistic a cross-sector retaliation mechanism can generate greater welfare and self-enforcement capability than a same-sector mechanism unless export-oriented lobbies are strong in the cross-sector targeted for retaliation. Even when cross-sector retaliation is welfare improving, there may be little additional benefit to extending retaliation to a different agreement. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:rye:wpaper:wp087&r=cta |
| By: | Enzo Brox; Daniel Goller |
| Abstract: | Tournaments are frequently used incentive mechanisms to enhance performance. In this paper, we use field data and show that skill disparities among contestants asymmetrically affect the performance of contestants. Skill disparities have detrimental effects on the performance of the lower-ability contestant but positive effects on the performance of the higher-ability contestant. We discuss the potential of different behavioral approaches to explain our findings and discuss the implications of our results for the optimal design of contests. Beyond that, our study reveals two important empirical results: (a) affirmative action-type policies may help to mitigate the adverse effects on lower-ability contestants, and (b) the skill level of potential future contestants in subsequent tournament stages can detrimentally influence the performance of higher-ability contestants but does not affect the lower-ability contestant. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.05210&r=cta |
| By: | Yaron Azrieli |
| Abstract: | Consider a large population of agents who repeatedly compete for awards, as in the case of researchers who can annually apply for grants from a science foundation. A key objective for the principal is to efficiently allocate resources to the highest quality applications, but the review process is often inherently noisy. Imperfect selection of winners may encourage low quality applications, which in turn forces the designer to commit more resources to the reviewing process and can further increase the misallocation. We study \emph{temporary exclusion} as a potential solution to these problems. With exclusion, an agent is ineligible to apply in the current period if they were rejected (or if they applied) in the previous period. Such policy introduces intertemporal incentives to the participation decision and encourages self-selection. We characterize the steady-state equilibria of this dynamic game and compare the outcomes to the benchmark case without exclusion. In particular, we show that whenever the benefit from winning is large, exclusion leads to fewer low quality applications and higher welfare for agents. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.06257&r=cta |