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on Contract Theory and Applications |
| By: | F. Barigozzi; P. Tedeschi |
| Abstract: | This paper investigates banks’ corporate social responsibility. Two different competitive credit markets do exist: one for standard projects and one for ethical ones. Ethical projects have also a social profitability, but a lower (positive) expected revenue with respect to standard ones. Ethical projects are financed by ethical banks and undertaken by motivated borrowers. These borrowers obtain additional benefit (a social responsibility premium) from accomplishing ethical projects when trading with ethical banks. If the expected profitability of ethical project is sufficiently close to that of standard ones and/or the social responsibility premium of motivated borrowers is sufficiently high, the market for ethical projects is active and the credit market is fully segmented. This result holds true irrespective of the information structure: only moral hazard on the borrower side, moral hazard and screening on the borrower side, moral hazard on the borrower side and screening on the lender side. The optimal contract in our set-up is always a debt contract. However, its precise form and welfare properties depend on the information structure. |
| JEL: | D86 G21 G30 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp786&r=cta |
| By: | Romstad, Eirik; Alfnes, Frode |
| Abstract: | It is well known from the compliance literature that whenever it costly to monitor agents' compliance to contract terms, compliance is likely to be incomplete. This paper goes one step further by examining the implications of incomplete monitoring on agent's sales offers in auctions for environmental contracts. From a monitoring perspective we show allocation contracts to least cost also produces another gain â that less resources need to be spend on monitoring and enforcement. To get full use of this insight one needs to have auction procedures that provide incentives for truthful revelation of agents' private alternate incomes. Our second result is that the incentives for truthful revelation is lost when monitoring is incomplete unless the expected value of compliance exceeds the expected value of noncompliance. We demonstrate this result theoretically and through an economic experiment using an induced value reverse multi unit auction. |
| Keywords: | environmental contract auctions, monitoring and compliance, truthful revelation, Environmental Economics and Policy, Resource /Energy Economics and Policy, |
| Date: | 2011–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaae11:115985&r=cta |
| By: | David A. Miller (University of California, San Diego); Kareen Rozen (Cowles Foundation, Yale University) |
| Abstract: | We study optimal contracting in a team setting with peer monitoring and moral hazard. This environment reflects stylized characteristics of production environments with complex tasks: agents have many opportunities to shirk, task-level monitoring is needed to provide useful incentives, and it is difficult to write performance-based clauses into explicit contracts. Incentives are provided informally, using wasteful punishments like guilt and shame, or slowed promotion. These features give rise to optimal contracts with "empty promises" and endogenous supervision structures. Agents make promises that they don’t necessarily intend to keep, leading to the optimal concentration of supervisory responsibility in the hands of one or two agents. |
| Keywords: | Partnership, Teams, Moral hazard, Monitoring, Supervision, Costly punishments |
| JEL: | C72 D86 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1823&r=cta |
| By: | J. Phillip Reiss; Irenaeus Wolff |
| Abstract: | We examine the incentive effects of funding contracts on entrepreneurial effort decisions and allocative efficiency. We experiment with four types of contracts (standard debt contract, outside equity, non-monotonic contract, full-subsidy contract) that differ in the structure of investor repayment and, therefore, in the incentives for entrepreneurial effort provision. Theoretically the replacement of a standard debt contract by a repayment-equivalent non-monotonic contract reduces effort distortions and increases efficiency. We test this non-monotonic-contracts hypothesis in the laboratory as well. Our results reveal that the incentive effects of funding contracts need to be experienced before they reect in observed behavior. With sufficient experience observed behavior is consistent with the theoretical predictions and supports the non-monotonic-contracts hypothesis: we find that the replacement of a standard debt contract by a repayment-neutral non-monotonic contract increases entrepreneurial income by 170% and total surplus by 30% in our setting. |
| Keywords: | hidden information, funding contracts, incentives, experiment, standard debt contract, non-monotonic contract |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:twi:respas:0070&r=cta |
| By: | Böheim, René (University of Linz); Leoni, Thomas (WIFO - Austrian Institute of Economic Research) |
| Abstract: | Sick workers in many countries receive sick pay during their illness-related absences from the workplace. In several countries, the social security system insures firms against their workers' sickness absences. However, this insurance may create moral hazard problems for firms, leading to the inefficient monitoring of absences or to an underinvestment in their prevention. In the present paper, we investigate firm' moral hazard problems in sickness absences by analyzing a legislative change that took place in Austria in 2000. In September 2000, an insurance fund that refunded firms for the costs of their blue-collar workers' sickness absences was abolished (firms did not receive a similar refund for their white-collar workers' sickness absences). Before that time, small firms were fully refunded for the wage costs of blue-collar workers' sickness absences. Large firms, by contrast, were refunded only 70% of the wages paid to sick blue-collar workers. Using a difference-in-differences-in-differences approach, we estimate the causal impact of refunding firms for their workers' sickness absences. Our results indicate that the incidences of blue-collar workers' sicknesses dropped by approximately 8% and sickness absences were almost 11% shorter following the removal of the refund. Several robustness checks confirm these results. |
| Keywords: | absenteeism, moral hazard, sickness insurance |
| JEL: | J22 I38 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6005&r=cta |
| By: | Saglam, Ismail |
| Abstract: | In this paper, we use a two-period one-to-one matching model with incomplete information to examine the effect of changes in divorce costs on marital dissolution. Each individual who has a nontransferable expected utility about the quality of each potential marriage decides whether to marry or to remain single at the beginning of the first period. Those who married in the first period learn the qualities of their marriages at the beginning of the second period and then decide whether to stay married or to unilaterally divorce. We show that for any society, there exist matching environments where the probability of the marital dissolution is not decreasing in divorce costs under a gender-optimal matching rule. In such environments an allocation effect of divorce costs with ambiguous sign outweighs an incentive effect which is always negative. |
| Keywords: | One-to-one matching; marriage dissolution; divorce; incomplete information |
| JEL: | C78 J12 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:33841&r=cta |
| By: | Uwe Dulleck (QUT); Jianpei Li (University of International Business and Economics) |
| Abstract: | Large infrastructure projects are a major responsibility of government, who usually lacks expertise to fully specify the demanded projects. Contractors, typically experts on such projects, advise of the needed design in their bids. Producing the right design is nevertheless costly. We model the contracting for such infrastructure projects taking into account this credence goods feature and examine the performance of commonly used contracting methods. We show that when building costs are public information, multistage competitive bidding involving shortlisting of two contractors and contingent compensation of both contractors on design efforts outperforms sequential search and the traditional Design-and-Build approach. While the latter leads to minimum design effort, sequential search suffers from a commitment problem. If building costs are the private information of the contractors and are revealed to them after design cost is sunk, competitive bidding may involve sampling more than two contractors. The commitment problem under sequential search may be overcome by the procurer’s incentive to search for low building cost if the design cost is sufficiently low. If this is the case, sequential search may outperform competitive bidding. |
| Keywords: | Credence Goods, Design-Build, Competitive Bidding, Sequential Search, Infrastructure Projects |
| JEL: | L14 D82 D44 R50 |
| Date: | 2011–10–05 |
| URL: | http://d.repec.org/n?u=RePEc:qut:auncer:2011_4&r=cta |
| By: | Kaplan, Todd (Department of Economics, University of Haifa); Ruffle, Bradley (Department of Economics, Ben-Gurion University) |
| Abstract: | We introduce a two-player, binary-choice game in which both players have a privately known incentive to enter, yet the combined surplus is highest if only one enters. Repetition of this game admits two distinct ways to cooperate: turn taking and cutoffs, which rely on the player's private value to entry. A series of experiments highlights the role of private information in determining which mode players adopt. If an individual's entry values vary little (e.g., mundane tasks), taking turns is likely; if these potential values are diverse (e.g., difficult tasks that differentiate individuals by skill or preferences), cutoff cooperation emerges. |
| JEL: | C90 Z13 |
| Date: | 2011–10–04 |
| URL: | http://d.repec.org/n?u=RePEc:haf:huedwp:wp201105&r=cta |
| By: | Riccardo Martina (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università di Napoli Federico II and CSEF) |
| Abstract: | In this short paper we study a competing vertical hierarchies model where the allocation of residual claimancy is endogenous and is determined jointly with production and contractual decisions. We .nd a set of circumstances in which the (equilibrium) allocation of residual claimancy is affected by competition in a non trivial manner. More precisely, although revenue-sharing contracts foster agents. (non-contractible) surplus enhancing effort, we show that competing principals dealing with exclusive and privately informed agents might still prefer to retain a share of the surplus from production when dealing with inefficient types. This is because reducing the surplus share of inefficient types reduces the information rent given up to efficient types. Hence, the equilibrium allocation of residual claimancy follows a pro-cyclical rule. |
| Keywords: | Adverse selection, residual claimancy, vertical hierarchies |
| Date: | 2011–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:291&r=cta |
| By: | Parsons, Donald O. (George Washington University) |
| Abstract: | Job displacement insurance typically includes both unemployment benefits and lump-sum severance pay, and each has provoked policy concerns. Unemployment insurance concerns have centered on distorted job search/offer acceptance decisions by the worker, severance-induced firing cost concerns on excessive labor hoarding by firms. A single period private contracting model is used to investigate the interaction of these two seemingly distinct issues. Viewed singly, familiar results emerge. The absence of separation benefits of any kind leads to excessive labor hoarding as a primitive form of earnings insurance. In a limited information environment, the distribution of job displacement insurance between the two benefit types becomes important. Unemployment insurance benefits must be limited (relative to first-best levels) and severance pay made more generous. Firing cost considerations are less familiar. Because the firm wants to provide benefits, they cannot be "contracted around." Although formally driven by the sum of (unsubsidized) severance pay and expected unemployment benefits, the second-best firing cost program limits severance pay only. Together the two constraints create an unpromising contracting environment. The firing cost constraint is the more easily relaxed by government action – subsidies of sufficient size to one or another of the separation programs will work. Offer acceptance requires restrictions on leisure (workfare). Unfortunately, if first-best benefits are mandated, efficiency requires that both be eased. |
| Keywords: | job displacement, unemployment insurance, severance pay, moral hazard, firing costs |
| JEL: | J65 J41 J33 J08 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6003&r=cta |
| By: | Rachmilevitch, Shiran (Department of Economics, University of Haifa) |
| Abstract: | An IPV 2-bidder second-price auction is preceded by two rounds of bribing: prior to the auction each bidder can try to bribe his rival to depart from the auction, so that he (the briber) will become the sole participant and obtain the good for the reserve price. Bribes are offered sequentially according to an exogenously given order - there is a first mover and a second mover. I characterize the unique efficient collusive equilibrium in monotonic strategies; in it, the second mover extracts the entire collusive gain. This equilibrium remains an equilibrium even when valuations are interdependent, and if they are separable then the full surplus extraction result continues to hold. Additionally, a family of pooling equilibria is studied, in which all the types of the first mover offer the same bribe. |
| Keywords: | Second-price auctions, collusion, bribing, signaling, surplus extraction |
| JEL: | D44 D82 |
| Date: | 2011–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:haf:huedwp:wp201107&r=cta |
| By: | Russo, Carlo; Perito, Maria Angela; Di Fonzo, Antonella |
| Abstract: | Large retail chains have spent considerable resources to promote production protocols and traceability across the supply chain, aiming at increasing food safety. Yet, the majority of consumers are unaware of these private food safety standards (PFSS) and retailers are not informing them. This behavior denotes a pooling paradox: supermarkets spend a large amount of money for food safety and yet they forget to inform consumers. The result is a pooling equilibrium where consumers cannot discriminate among high quality and low quality products and supermarkets give up the potential price premium. This paper provides an economic explanation for the paradox using a contract-theory model. We found that PFSS implementation may be rational even if consumers have no willingness to pay for safety, because the standard can be used as a tool to solve asymmetric information along the supply chain. Using the PFSS, supermarkets can achieve a separating equilibrium where opportunistic suppliers have no incentive to accept the contract. Even if consumers exhibit a limited (but strictly positive) willingness to pay for safety, advertising may be profit-reducing. If the expected price margin is high enough, supermarkets have incentive to supply both certified and uncertified products. In this case, we show that, if consumers perceive undifferentiated products as âreasonably safeâ, supermarkets may maximize profits by pooling the goods and selling them as undifferentiated. This result is not driven by advertising costs, as we derive it assuming free advertising. |
| Keywords: | Agribusiness, Food Consumption/Nutrition/Food Safety, |
| Date: | 2011–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaae11:115987&r=cta |
| By: | Glebe, Thilo W. |
| Keywords: | Resource /Energy Economics and Policy, |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaae11:114625&r=cta |