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on Contract Theory and Applications |
| By: | Di Corato, Luca; Moretto, Michele |
| Abstract: | We consider a long-term contractual relationship in which a buyer procures a fixed quantity of a product from a supplier and then sells it on the market. The production cost is private information and evolves randomly over time. The solution to this dynamic principal-agent problem involves a periodic two-part payment. The fixed part of the payment depends on the initial supplier’s cost type while the other is contingent on the current cost type. A notable feature is that, by using the information about the initial cost type, the buyer can reduce the burden of information rents paid for the revelation of the future cost type. We show that the distortion, resulting from information asymmetry, remains constant over time and decreases with the initial type. Lastly, we show that our analysis immediately applies also when input prices are private information and evolve randomly over time. |
| Keywords: | Demand and Price Analysis, Industrial Organization, Productivity Analysis |
| Date: | 2024–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:ags:feemwp:340040&r=cta |
| By: | Ashwin Kambhampati |
| Abstract: | A principal provides nondiscriminatory incentives for independent and identical agents. The principal cannot observe the agents' actions, nor does she know the entire set of actions available to them. It is shown, very generally, that any worst-case optimal contract is nonaffine in performances. In addition, each agent's pay must depend on the performance of another. In the case of two agents and binary output, existence of a worst-case optimal contract is established and it is proven that any such contract exhibits joint performance evaluation -- each agent's pay is strictly increasing in the performance of the other. The analysis identifies a fundamentally new channel leading to the optimality of nonlinear team-based incentive pay. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.16542&r=cta |
| By: | Alexandra Moura; Carlos Oliveira |
| Abstract: | We consider an investment model in which a firm decides to invest in the market, taking into account its future revenue and the possible occurrence of adverse events that may impact its reputation. The firm can buy an insurance contract at the investment time to mitigate reputation risk. The firm decides when to enter the market and the insurance strategy that maximizes its value. We consider three types of insurance contracts and different premium principles. We provide analytical conditions for the optimum and study several numerical examples. Results show that the firm’s optimal strategy depends on the risk size, the firm’s risk aversion, and the insurance premium. |
| Keywords: | Reputaion Risk, Insurance, Risk Mitigation, Investment Strategies, Real Options. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp03092024&r=cta |