nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2024‒05‒20
eight papers chosen by
Guillem Roig, University of Melbourne

  1. Trust in Vertical Relations By Giacomo Calzolari; Leonardo Felli; Johannes Koenen; Giancarlo Spagnolo; Konrad Stahl
  2. Profit Sharing in Partnerships: Complementarity, Productivity, and Commitment By Byung-Cheol Kim; Jin Yeub Kim; Hyunjun Cho
  3. Repeated Trade with Imperfect Information about Previous Transactions By Francesc Dilme
  4. Obscure contract terms: an inadvertent pricing experiment By Stephen J. Choi; Mitu Gulati; Ugo Panizza; Robert E. Scott; W. Mark C. Weidemaier
  5. Bargaining and Dynamic Competition By Shanglyu Deng; Dun Jia; Mario Leccese; Andrew Sweeting
  6. Biased Beliefs of Consumers and Two-Part Tariff Competition By Koji Ishibashi
  7. A Dynamic Model of Predation By Patrick Rey; Yossi Spiegel; Konrad Stahl
  8. The design of insurance contracts for home versus nursing home Long-Term Care By Lozachmeur, Jean-Marie; Borsenberger, Claire; Cremer, Helmuth; Joram, Denis; Malavolti, Estelle

  1. By: Giacomo Calzolari; Leonardo Felli; Johannes Koenen; Giancarlo Spagnolo; Konrad Stahl
    Abstract: Using data from a unique survey on all buyers and crtical suppliers in German automotive production, we explore the role of trust in long-term procurement relationships. Higher trust leads to higher quality of the automotive parts, and to more competition among suppliers. These effects are significant for low-tech parts only, and not for high tech ones, even when the buyer procures parts from the same supplier. We rationalize these unexpected findings within a relational contracting model, where technology-specific differences in the cost of switching suppliers determine the bargaining power in part-specific procurement relationships.
    Keywords: Relational Contracts, Hold-up, Buyer-Supplier Contracts, Bargaining Power
    JEL: D86 L14 L62 O34
    Date: 2024–04
  2. By: Byung-Cheol Kim (University of Alabama); Jin Yeub Kim (Yonsei University); Hyunjun Cho (Yonsei University)
    Abstract: In a partnership game, a principal and an agent negotiate over their profitsharing rule, after which each individually chooses effort, generating profits. We study the roles of complementarity in efforts, asymmetric productivity, and timing of effort choices in profit-sharing partnerships. When the agent is relatively more productive than the principal, the agent gets lower bargaining power under a stronger degree of complementarity. The surplus of the partnership is always higher in the case of sequential effort choice than in the simultaneous-choice counterpart. We provide implications for allocation of ownership in corporate governance, surplus maximization in partnerships, and optimal hiring.
    Keywords: game theory; Partnership, Ownership Structure, Profit-Sharing Rule, Negotiation, Complementarity.
    JEL: C72 C78 G32 L14
    Date: 2024–04
  3. By: Francesc Dilme (Department of Economics, University of Bonn)
    Abstract: This paper studies repeated trade with noisy information about previous transactions. A buyer has private informa- tion about his willingness to pay, which is either low or high, and buys goods from different sellers over time. Each seller observes a noisy history of signals about the buyer’s previous purchases and sets a price. We compare the cases where previous prices are observable to sellers with the case where they are not. We show that more signal precision is counterbalanced by two equilibrium mechanisms that slow learning and keep incentives in balance: (1) sellers offer discounted prices more often, and (2) the buyer rejects high prices with a higher probability. The effect of making prices observable depends on the signal precision: When the signal is imprecise, making prices public strengthens the discounting mechanism, improving efficiency and buyer welfare; when the signal is precise, making prices public activates the rejection mechanism, and efficiency and buyer welfare may decrease. Independently of the price observability, the buyer tends to benefit from a more precise signal about previous purchases.
    Keywords: Repeated trade, asymmetric information, internet cookies
    JEL: C73 C78 D82
    Date: 2024–04
  4. By: Stephen J. Choi (New York University); Mitu Gulati (University of Virginia (Law)); Ugo Panizza (Geneva Graduate Institute (International Economics)); Robert E. Scott (Columbia University (Law)); W. Mark C. Weidemaier (University of North Carolina at Chapel Hill (Law))
    Abstract: Contract terms that improve or reduce the likelihood of repayment of a debt should impact its price. That’s basic economics. But what about a contract that is hundreds of pages long and has lengthy and complex terms that even the lawyers are unwilling to read? Believers in efficient markets might predict that variations that affect the likelihood of repayment in such obscure contract terms will be priced at the outset if there are profits to be made by exploiting these variations. An alternate view is that little attention is paid to the fine print in highly standardized contracts until the likelihood of default becomes sufficiently salient to make reading the fine print worthwhile. Using several inadvertent real-world experiments, we examine the question of how and when variations that are assumed to be standardized in obscure contract terms are priced.
    Keywords: Contract complexity; Market efficiency; Career trajectories; Sovereign Debt
    JEL: G14 K12 G12
    Date: 2024–04–25
  5. By: Shanglyu Deng; Dun Jia; Mario Leccese; Andrew Sweeting
    Abstract: Industries with significant scale economies or learning-by-doing may come to be dominated by a single firm. Economists have studied how likely this is to happen, and whether it is efficient, using models where buyers are price or quantity takers, even though these industries are often also characterized by buyer-seller negotiations. We extend the dynamic “learning-by-doing and forgetting” model of Besanko, Doraszelski, Kryukov, and Satterthwaite (2010) to allow for Nash-in-Nash bargaining over prices. Price-taking and the social planner solution are captured as special cases. We show that sellers’ dynamic incentives, market concentration and welfare can change sharply, and non-monotonically, as one moves away from the price-taking assumption. We study the implications of buyer bargaining power for the existence of multiple equilibria, the design of subsidy policies and the welfare effects of policies designed to increase competition.
    JEL: C73 D21 D43 L13 L41
    Date: 2024–04
  6. By: Koji Ishibashi (Department of Economics, Keio University)
    Abstract: This paper explores how firms respond in designing two-part tariffs to consumers' biased beliefs about their preferences. Biased consumers could be either overpessimistic when they underestimate their true demand or overoptimistic when they overestimate. Assuming that unbiased consumers consist of two types with high and low valuations, I show that the effect of the presence of biased consumers on unbiased consumers depends on market structure. The monopolist wants to educate overpessimistic consumers while may not want to educate overoptimistic consumers. Alternatively, in competition, firms do not have the incentive to educate any biased consumers. A debiasing policy for either overpessimistic or overoptimistic consumers unambiguously improves social welfare in competition but could harm social welfare in monopoly.
    Keywords: biased belief, overoptimistic consumers, overpessimistic consumers, two-part tariff
    JEL: D42 D43 D91 L12 L13
    Date: 2024–04–11
  7. By: Patrick Rey; Yossi Spiegel; Konrad Stahl
    Abstract: We study the feasibility and profitability of predtion in a dynamic environment, using a parsimonious infinite-horizon, complete information setting in which an incumbent repeatedly faces potential entry. When a rival enters, the incumbent chooses whether to accommodate or predate it; the entrant then decides whether to stay or exit. We show that there always exists a Markov perfect equilibrium, which can be of three types: accommodation, monopolization, and recurrent predation. We then analyze and compare the welfare effects of different antitrust policies, accounting for the possibility that recurrent predtion may be welfare improving.
    Keywords: predation, accommodation, entry, legal rules, Markov perfect equilibrium
    JEL: D43 L41
    Date: 2024–04
  8. By: Lozachmeur, Jean-Marie; Borsenberger, Claire; Cremer, Helmuth; Joram, Denis; Malavolti, Estelle
    Abstract: We study the design of optimal (private and/or social) insurance schemes for formal home care and institutional care. We consider a three period model. Individuals are either in good health, lightly dependent or heavily dependent. Lightly dependent individuals can buy formal home care which reduces the severity of dependency and reduces the probability to become severely dependent in the next period. Severely dependent individuals pay for nursing home care. In both states of dependency individuals can receive a (private or public) insurance benefit (transfers). These benefits can be flat or depend on the formal care consumed (or a combination of the two). These benefits are financed by a premium (or a tax). Individuals may be alive until the end of period 2 or die at the beginning of periods 1 or 2 with a certain probability which may depend on their state of health. The laissez faire is inefficient because individuals consume a too low level of formal home care and are not insured. The first-best insurances scheme requires a transfer to lightly dependent individuals that, (under some conditions) increases with the amount of formal home care consumed. Severely dependent individuals, on the other hand, must receive a flat transfer (from private or social insurance). The theoretical analysis is illustrated by a calibrated numerical example which show that the expressions have the expected signs under plausible conditions.
    Keywords: Long-term care insurance; formal home care; nursing home; care
    JEL: I13 I18 H51
    Date: 2024–04–29

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