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on Contract Theory and Applications |
| By: | Chengfeng Shen (Peking University); Felix Kubler (University of Zurich); Yucheng Yang (University of Zurich; Swiss Finance Institute); Zhennan Zhou (Westlake University) |
| Abstract: | We develop a new method to efficiently solve for optimal lotteries in models with non-convexities. In order to employ a Lagrangian framework, we prove that the value of the saddle point that characterizes the optimal lottery is the same as the value of the dual of the deterministic problem. Our algorithm solves the dual of the deterministic problem via sub-gradient descent. We prove that the optimal lottery can be directly computed from the deterministic optima that occur along the iterations. We analyze the computational complexity of our algorithm and show that the worst-case complexity is often orders of magnitude better than the one arising from a linear programming approach. We apply the method to two canonical problems with private information. First, we solve a principal-agent moral-hazard problem, demonstrating that our approach delivers substantial improvements in speed and scalability over traditional linear programming methods. Second, we study an optimal taxation problem with hidden types, which was previously considered computationally infeasible, and examine under which conditions the optimal contract will involve lotteries. |
| Keywords: | Private Information, Adverse Selection, Moral Hazard, Non-Convexities, Lotteries, Lagrangian Iteration |
| JEL: | C61 C63 D61 D82 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2548 |
| By: | Mats Kröger; Karsten Neuhoff; Sebastian Schwenen |
| Abstract: | We examine the impact of the war in Ukraine on long-term contracts in energy markets. We find that traded contract volumes fall by 65 percent in the first months of the war. A collapse in bilateral trading contributes most to this decline. To protect themselves from price shocks, firms increasingly turned to long-term contracts already before the war. In sum, our results show that the market continued to serve firms’ hedging needs during the crisis, but bilateral trading networks collapsed, and liquidity was largely provided by centralized markets. |
| Keywords: | Firm behavior, long-term contracts, forward markets, crisis, electricity |
| JEL: | D22 P48 G14 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2118 |
| By: | Vitezslav Titl |
| Abstract: | Approximately 42% of European public procurement contracts are awarded to a sole bidder. As this market represents about one-seventh of GDP in developed countries, any inefficiency is a first-order concern. This paper examines a Czech reform that prohibited awarding such single-bid contracts. Using a difference-in-differences approach, I find the reform reduced prices by 6.1% relative to estimated costs, with no evidence of quality reduction. Furthermore, I provide suggestive evidence that procuring authorities try to actively get more bidders and that the prices of procurement contracts supplied by politically connected and anonymously owned firms were not reduced after the reform. |
| Keywords: | single-bidding, public procurement, political connections, corruption |
| JEL: | D44 D72 H57 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11697 |
| By: | Gian Luigi Albano (Consip S.p.A. and LUISS Guido Carli University); Walter Ferrarese (Universitat de les Illes Balears); Alberto Iozzi (DEF & CEIS, University of Rome "Tor Vergata"); Roberto Pezzuto (DEF, University of Rome "Tor Vergata") |
| Abstract: | Many real-world public-sector purchases involve a combination of verifiable and non-verifiable dimensions of quality, leading to a classical incomplete-contracting problem. This paper analyses how public buyers may use debarment lists — in essence, blacklists of under-performing contractors — to incentivize quality provision in repeated procurement tenders. A key question is whether debarment lists should be shared among multiple agencies or maintained separately. Sharing multiplies the punishment for bad performance (an under-performing firm loses access to all agencies, not just one), which might strongly deter shirking. However, this paper shows that sharing debarment lists backfires when mistakes may occur in judging quality ex-post: if one agency erroneously penalizes a cooperative contractor, that error propagates to every agency, potentially discouraging contractors from exerting high quality in the first place. By modelling repeated interactions and allowing for observational errors, we show the implicit costs stemming from a shared debarment list, and draw policy lessons for designing blacklists in public procurement. |
| Keywords: | Public procurement, Relational contracts, Unverifiable quality, Debarment |
| JEL: | H57 |
| Date: | 2025–04–29 |
| URL: | https://d.repec.org/n?u=RePEc:rtv:ceisrp:598 |