nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2023‒12‒04
three papers chosen by
Guillem Roig, University of Melbourne

  1. Contract Design With Safety Inspections By Alireza Fallah; Michael I. Jordan
  2. Finding a better renewal time and improved contract design for switches and crossings By Odolinski, Kristofer; Nissen, Arne; Ait-Ali, Abderrahman
  3. Lagged-Price Reimbursement Contracts: The Impact of Medicare Part B on Pharmaceutical Price Growth By Angelique Acquatella; Keith Marzilli Ericson; Amanda Starc

  1. By: Alireza Fallah; Michael I. Jordan
    Abstract: We study the role of regulatory inspections in a contract design problem in which a principal interacts separately with multiple agents. Each agent's hidden action includes a dimension that determines whether they undertake an extra costly step to adhere to safety protocols. The principal's objective is to use payments combined with a limited budget for random inspections to incentivize agents towards safety-compliant actions that maximize the principal's utility. We first focus on the single-agent setting with linear contracts and present an efficient algorithm that characterizes the optimal linear contract, which includes both payment and random inspection. We further investigate how the optimal contract changes as the inspection cost or the cost of adhering to safety protocols vary. Notably, we demonstrate that the agent's compensation increases if either of these costs escalates. However, while the probability of inspection decreases with rising inspection costs, it demonstrates nonmonotonic behavior as a function of the safety action costs. Lastly, we explore the multi-agent setting, where the principal's challenge is to determine the best distribution of inspection budgets among all agents. We propose an efficient approach based on dynamic programming to find an approximately optimal allocation of inspection budget across contracts. We also design a random sequential scheme to determine the inspector's assignments, ensuring each agent is inspected at most once and at the desired probability. Finally, we present a case study illustrating that a mere difference in the cost of inspection across various agents can drive the principal's decision to forego inspecting a significant fraction of them, concentrating its entire budget on those that are less costly to inspect.
    Date: 2023–11
  2. By: Odolinski, Kristofer (Swedish National Road & Transport Research Institute (VTI)); Nissen, Arne (Trafikverket (The Swedish Transport Administration)); Ait-Ali, Abderrahman (Swedish National Road & Transport Research Institute (VTI))
    Abstract: Switches and crossings are critical assets in railway systems and their maintenance and renewal costs can be substantial. This paper evaluates the economic impact of cumulative loads on such assets and the effect of different contract designs for railway maintenance. Results from survival analyses are combined with a life cycle costing model to analyse costs for maintenance, train delays, and renewals. The findings provide insights into improving the timing of asset renewal as well as the impact of different reimbursement rules in the design of maintenance contracts. The estimated optimal lifetimes of different types of switches and crossings are similar to their technical lifetimes, yet there a couple of exceptions. The estimated effects of the reimbursement rule provide unique results on the risk premiums allowed in order to achieve a break-even between different maintenance contract designs.
    Keywords: Switches and crossings; Maintenance; Renewal; Lifecycle costs; Contract design; Reimbursement rule
    JEL: H57 R42
    Date: 2023–11–15
  3. By: Angelique Acquatella; Keith Marzilli Ericson; Amanda Starc
    Abstract: We examine cost-plus lagged-price reimbursement contracts, focusing on Medicare Part B's payment for physician-administered drugs. Our theoretical model shows that lagged-price reimbursement can raise launch prices but lower prices in later periods. While previous research showed Part B increased launch prices, we estimate its effect on later prices (net of rebates). Drugs more exposed to Medicare have lower price growth. A drug with above median Part B exposure has a 10% lower price after 3 years than a below median exposure drug that launched at the same price, with a larger effect for newly approved molecules.
    JEL: H57 I11
    Date: 2023–11

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