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on Contract Theory and Applications |
| By: | Guillermo Alonso Alvarez; Ibrahim Ekren; Liwei Huang |
| Abstract: | We study a continuous time contracting model in which a principal hires a risk averse agent to manage a project over a finite horizon and provides sequential payments whose timing is endogenously determined. The resulting nonzero-sum interaction between the principal and the agent is reformulated as a mixed control and stopping problem. Using numerical simulations, we investigate how factors such as the relative impatience of the parties and the number of bonus payments influence the principal's value and the structure of the optimal bonus payment scheme. A notable finding is that, in some contractual environments, the principal optimally offers a sign-on bonus to front-load incentives. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.23424 |
| By: | Yijun Liu |
| Abstract: | This paper studies a dynamic screening model in which a principal hires an agent with limited liability. The agent's private cost of working is an i.i.d. draw from a continuous distribution. His working status is publicly observable. The limited liability constraint requires that payments remain nonnegative at all times. In this setting, despite costs being i.i.d. and the payoffs being additively separable across periods, the optimal mechanism does not treat each period independently. Instead, it features backloading payments and requires the agent to work in consecutive periods. Specifically, I characterize conditions under which the optimal mechanism either grants the agent flexibility to start working in any period or restricts the starting period to the first. In either case, once the agent begins working, he is incentivized to work consecutively until the end. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.19838 |
| By: | Rafael Finck; Derck Koolen; Arnaud Mercier; Marija Miletic; Gonçalo Terça; Andreas Zucker |
| Abstract: | The European Union’s goal of achieving climate neutrality by 2050 requires substantial investments in low carbon electricity generation, particularly wind, solar and nuclear power. By 2040, the EU aims for over 90% of electricity to come from low-carbon sources. This study examines the cost-competitiveness of various low carbon technologies in different market environments and the influence of two key mechanims that support their investment and integration in the market: flexibility and long-term contacts. Overall, the cost-competitiveness on a market basis of low-carbon electricity generation is possible but it is sensitive to the cost of capital and the commodity cost of price-setting technologies. Flexibility, which is the ability of assets to adjust energy consumption or production, plays an essential role in the integration of electricity from renewable sources. While flexibility has in general a positive effect on the profitability of low carbon technologies and reduces price volatility, the analysis highlights the clear need to ensure coherence across policies supporting the integration of renewable energy and flexibility. Contracts for Difference (CfDs) are long-term contracts between an electricity generator and a public entity, providing a stable revenue for the generator and protection for consumers from volatile and extreme prices. The strike price of a CfD contract is a key parameter determining the profitability for producers and the cost-effectiveness of the instrument for the public counterparty. The analysis shows that CfD revenues and cash flows largely depend on the potential for the technology to capture (high) market prices, and the level of the agreed strike prices per technology, indicating the importance of competitive auctions to allocate these CfDs. |
| JEL: | Q40 Q42 Q47 Q48 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:euf:dispap:236 |
| By: | Chengfeng Shen; Felix K\"ubler; Zhennan Zhou |
| Abstract: | In this paper we examine non-convex dynamic optimization problems with forward looking constraints. We prove that the recursive multiplier formulation in \cite{marcet2019recursive} gives the optimal value if one assumes that the planner has access to a public randomization device and forward looking constraints only have to hold in expectations. Whether one formulates the functional equation as a sup-inf problem or as an inf-sup problem is essential for the timing of the optimal lottery and for determining which constraints have to hold in expectations. We discuss for which economic problems the use of lotteries can be considered a reasonable assumption. We provide a general method to recover the optimal policy from a solution of the functional equation. As an application of our results, we consider the Ramsey problem of optimal government policy and give examples where lotteries are essential for the optimal solution. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.20303 |
| By: | Hideshi Itoh (Waseda Business School, Waseda University, JAPAN); Takashi Shimizu (Graduate School of Economics, Kobe University, JAPAN); Yasuo Takatsuki (Research Institute for Economics and Business Administration, Kobe University, JAPAN) |
| Abstract: | This paper examines the interaction between formal and relational enforcement in early modern Japan, focusing on financial relationships between Daimyo (regional lords) and merchants. Due to class distinctions, loans from merchants to Daimyo lacked legal enforceability, while contracts among merchants were court-enforceable. Some merchants built long-term self-enforcing relationships with Daimyo (becoming Tachiiri), whereas others provided short-term formal loans to underfunded Tachiiri. We develop a model with two markets—one that matches Daimyo with merchants, and the other that matches underfunded Tachiiri with lending merchants—and identify conditions for their co-existence in equilibrium. The analysis shows that merchants value becoming Tachiiri for long-term gains, and that the opportunities for short-term formal lending enhance the sustainability of relational contracts between Daimyo and Tachiiri. |
| Keywords: | Relational contracts; Formal contracts; Matching markets; Financial relationships; Early modern Japan |
| JEL: | C73 D53 D83 D86 N25 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2025-33 |