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on Contract Theory and Applications |
| By: | Martimort, David; Poudou, Jean-Christophe; Thomas, Lionel |
| Abstract: | A buyer (the principal) procures a good or service from a risk-neutral seller (the agent). The seller, protected by limited liability, has private information on his marginal cost of production (adverse selection), and exerts a non-verifiable effort that increases surplus (moral hazard). Even when the effort and production technologies are separable, the optimal contract always mixes features that are found separately under with pure moral hazard or pure screening. Screening distortions are mitigated in comparison with the pure screening scenario with the possibility of bunching for the least efficient types even in contexts where full separation would be obtained with pure screening. Effort distortions are also used as a screening device. In comparison with a pure moral hazard scenario, those distortions may be lessened for the most efficient types, up to the point of possibly allowing implementation of the first-best effort, while they are worsened for the worst types. Although our analysis is cast in a simple procurement setting, we illustrate our findings in other economic environments of general interest including economic and environmental regulation, financial contracting, provision of quality in services, and price discrimination. |
| Keywords: | Adverse selection; moral hazard; contract theory |
| JEL: | D82 |
| Date: | 2025–03–11 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:130428 |
| By: | Aase, Knut K. (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | We analyze optimal risk sharing between a customer and an in surer, and present alternative explanations for the prevalence of kinks in Pareto optimal contracts, like deductibles and upper bounds as in XL-contracts. Linear indemnity functions have primarily been considered in the literature. We focus on nonlinear contracts, which can be explained on the basic of different preferences held by the parties involved. In this setting we derive Pareto optimal contracts with ”near” deductibles and ”near’ caps, which we illustrate by examples. Lastly we consider a model based on non-verifiability where the insurer is risk-neutral. We change to a setting where both the cedent and the reinsurer are strictly risk averse. This rationalizes both an endogenous upper cap and a deductible, retaining compensations for risk bearing. |
| Keywords: | Pareto optimal risk sharing; nonlinear contracts; XL-contracts; non-verifiability |
| JEL: | G00 G22 |
| Date: | 2025–02–26 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nhhfms:2025_008 |
| By: | Caprice, Stéphane; Shekhar, Shiva |
| Abstract: | In this paper, we study supplier encroachment in competition with multi-product retailers and its effects on retail profits under endoge-nous consumer shopping behavior. We find that supplier encroach-ment (weakly) increases both supplier and retailer profits, as the re-tailer benefits from better consumer segmentation and price discrim-ination despite (weakly) higher wholesale prices. The effect of en-croachment on consumers is more nuanced: when the competitive product’s value is high, consumers benefit. Instead, when the value of the competitive product is low, consumers buying exclusively from the multi-product retailer are worse off while consumers who mix and match across stores are better off. Overall, supplier encroachment can improve market outcomes if the value of the supplier’s product offering is sufficiently high. |
| Keywords: | Encroachment; Vertical Contracting; Downstream Competition and Consumer Shopping Costs. |
| JEL: | L13 L22 L42 L81 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:130442 |
| By: | Paul Rodríguez-Lesmes (Institute for Fiscal Studies); Marcos Vera-Hernandez (Institute for Fiscal Studies) |
| Date: | 2025–02–24 |
| URL: | https://d.repec.org/n?u=RePEc:ifs:ifsewp:25/08 |