|
on Contract Theory and Applications |
| By: | Ganglmair, Bernhard; Klix, Julian; Shin, Dongsoo |
| Abstract: | Many business relationships begin with informal interactions and later transition to formal contracts. Using a repeated-games model with a finite horizon, we show that this hybrid-contracting approach can both prolong cooperation (intensive margin) and enable it across a broader range of settings (extensive margin). We model the contract as a "smooth-landing contract" that limits actions only near the end of the relationship. We show that this flexible design supports early cooperation and outperforms rigid contracts. Our findings are robust to changes in contracting costs and timing, with optimal contract length balancing profitability and implementability. |
| Keywords: | cooperation, hybrid contracting, relational contracts, repeated games, strategic alliances |
| JEL: | C73 D86 K12 L14 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:zewdip:327114 |
| By: | Heng-fu Zou |
| Abstract: | This paper develops a continuous-time model of contracting between a principal and many agents under moral hazard, linking dynamic contract theory to the mean field game(MFG) framework. Outputs depend on effort, competition, and both idiosyncratic and common shocks. The principal designs contracts using filtered signals that benchmark agents against peers. We show that the first-order approach remains valid: effort is linear in exposure with slope determined by the informativeness of fltered outputs. The Hamilton-Jacobi-Bellman equation implies that optimal incentives depend jointly on marginal revenue, signal variance, and intertemporal insurance. The optimal filter is the generalized least squares residual, which asymptotically eliminates common shocks as group size grows. In a linear-quadratic specialization, equilibrium exists, is unique, and is globally stable, with the uniqueness result coinciding with the Lasry-Lions MFG fixed-point condition. The framework unifies tournaments, RPE, and dynamic contracts, and explains empirical puzzles in executive pay, sales teams, and finance. |
| Keywords: | Dynamic contracts; Principal-agent problem; Multi-agent incentives; Relative performance evaluation; Tournaments; Mean field games; Hamilton-Jacobi-Bellman equation; Fokker-Planck dynamics; Incentives and insurance; Executive compensation; Organizational design |
| Date: | 2025–09–10 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:790 |
| By: | Bos, Olivier; Fugger, Nicolas; Onderstal, Sander |
| Abstract: | We investigate profit-share auctions in a procurement context, comparing them with traditional cash auctions to identify which mechanism yields lower expenses for buyers. We also explore whether specifying a high project value in profit-share auction contracts influences supplier bidding behavior. Using theoretical analysis and experimental methods, we observe that profit-share auctions lead to lower buyer expenses compared to traditional cash auctions. Furthermore, we find that the buyer benefits from specifying a high project value in the contract, as this commitment induces more aggressive bidding from the suppliers. While profit-share auctions result in significantly lower buyer expenses than cash auctions, the observed differences are smaller than predicted. This discrepancy is due to (i) more pronounced underbidding in cash auctions and (ii) lower efficiency in profit-share auctions caused by noisy bidding. Our findings suggest that managers can reduce procurement costs by adopting profit-share auctions and strategically committing to a high project value in contracts. However, they should be aware that real-world savings may be smaller than theoretically predicted due to supplier bidding behavior. |
| Keywords: | procurement, profit-share auctions, experiment |
| JEL: | D44 C92 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:zewdip:327106 |
| By: | Mariann Ollár; Antonio Penta |
| Abstract: | We study a framework for robust mechanism design that can accommodate various degrees of robustness with respect to agents' beliefs, which encompasses both the belief-free and Bayesian settings as special cases. For general belief restrictions, we characterize the set of incentive compatible direct mechanisms in general environments with interdependent values. Our main results, which we obtain based on a first-order approach, inform the design of transfers via 'belief-based' terms to attain incentive compatibility. In environments that satisfy a property of generalized independence, our results imply a robust version of revenue equivalence in non-Bayesian settings. Instead, under a notion of comovement between types and beliefs, which extends the idea of correlated information to non-Bayesian settings, we show that any allocation rule can be implemented, even if standard single-crossing and monotonicity conditions do not hold. Yet, unless the environment is Bayesian, information rents typically remain, and they decrease monotonically as the robustness requirements are weakened. |
| Keywords: | belif restrictions, incentive compatibility, interdependent values, moment conditions, robust mechanism design |
| JEL: | D62 D82 D83 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1513 |