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on Contract Theory and Applications |
| By: | Leo Kaas (University of Konstanz); Carlos Carrillo-Tudela (Essex) |
| Abstract: | We analyze the effects of adverse selection on worker turnover and wage dynamics in a frictional labor market. We consider a model of on-the-job search where firms offer promotion wage contracts to workers of different ability, which is unknown to firms at the hiring stage. With sufficiently strong information frictions, low-wage firms offer separating contracts and hire all types of workers in equilibrium, whereas high-wage firms offer pooling contracts, promoting high-ability workers only. Low-ability workers have higher turnover rates and are more often employed in low-wage firms. The model replicates the negative relationship between job-to-job transitions and wages observed in the U.S. labor market. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:351&r=all |
| By: | Piero Gottardi (European University Institute); Guido Ruta (NYU and University of Bologna); Alberto Bisin (New York University) |
| Abstract: | This paper analyzes a class of competitive economies with production, incomplete financial markets, and agency frictions. Firms take their production, financing, and contractual decisions so as to maximize their value under rational conjectures. We show that competitive equilibria exist and that shareholders always unanimously support firms' choices. In addition, equilibrium allocations have well-defined welfare properties: they are constrained efficient when information is symmetric, or when agency frictions satisfy certain specific conditions. Furthermore, equilibria may display specialization on the part of identical firms and, when equilibria are constrained inefficient, may exhibit excessive aggregate risk. Financial decisions of the corporate sector are determined at equilibrium and depend not only on the nature of financial frictions but also on the consumers' demand for risk. Financial intermediation and short sales are naturally accounted for at equilibrium. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:358&r=all |
| By: | Vergamini, Daniele; White, Benedict; Viaggi, Davide |
| Abstract: | Various alternative agri-environmental payments approach have been theoretically and empirically designed in Europe (EU), United States (US) and Australia (AUS) with the aim to reduce information rent and increasing the costeffectiveness of the measures. Despite much theoretical analysis on incentive-compatible agri-environmental contracts and wide experimentation of conservation auction in the US and AUS, the main debate on the EU agri-environmental payment still focused on problem of efficiency instead of facing the effectiveness. The main obstacle to designing and implementing more efficient and targeted agri-Environmental Payments (AEP) is limited information on the side of policy makers which can give rise to adverse selection and moral hazard limiting the effectiveness of the schemes and making them expansive to run. Auctions are a category of innovative policy mechanism designed to address adverse selection and to induce farmers to reveal, through competitive bidding, their compliance costs to the government. This paper provide a simulation of an input based menu of contracts model, and of a one-shot procurement auction with data from Farm Accountancy Data Network 2012 (FADN) of Regione Emilia-Romagna (RER), in order to test the relevance of the two methods for designing more cost-effective AE payments. The case study developed for EmiliaRomagna (E-R) demonstrates the heterogeneity in compliance cost. The results of the auction model highlight a significant cost saving compared with the traditional flat rate schemes. The result of the contract model confirm that the recourse of the revelation principle and mechanism design have a potential to reduce information rent and negotiation cost. However, though not directly addressed in this paper, there are several recognized limitation in the literature, which could affect both simulation results and the ability of the methods to contribute in the design of cost-effective AE payments. |
| Keywords: | agri-environmental policy, auction, contract, information asymmetry, adverse selection, Agricultural and Food Policy, |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aiea15:207357&r=all |
| By: | Eduardo Engel; Ronald Fischer; Alexander Galetovic |
| Abstract: | Public-private partnerships (PPPs) are an increasingly popular organizational form of providing public infrastructure. They can increase efficiency and improve resource allocation, yet pervasive contract renegotiations cast doubts on whether they should be preferred over public provision. Renegotiating a PPP contract allows the present government to extract resources from future governments in exchange for current infrastructure spending by the PPP. This option is not available under public provision. We develop a model that formalizes this idea and predicts that government will use renegotiations to anticipate spending and shift payments to future administrations. Regulating renegotiation procedures so as to avoid opportunistic behavior does not avoid the use of renegotiations to anticipate government spending, changing fiscal accounting rules does. We analyze data from Chile, Colombia and Peru, comprising 59 highway PPPs and 535 renegotiation processes, to conclude that the evidence is broadly consistent with the predictions of our model. We find that the magnitude of renegotiations is substantial: renegotiations per concession year average 9.5% of the initial investment in Colombia, 3.6% in Peru and 1.3% in Chile. With concessions that last many decades, this suggests that the magnitude of renegotiations will end up being larger than the initial investment for many concessions, as is already the case for 11 out of the 25 concessions in Colombia. Most of the cost of renegotiations falls on future administrations and in the three countries more than 45% of renegotiations, as measured by volume, occur during the construction phase, which can be interpreted as evidence against incomplete contract models of renegotiations and in favor of our model. |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:udc:wpaper:wp408&r=all |
| By: | Bardey, David; Li, Sanxi; Wu, Yaping |
| Abstract: | This paper analyzes the three-party contracting problem among the payer, the patient and the physician when the patient and the physician may collude to exploit mutually beneficial opportunities. Under the hypothesis that side transfer is ruled out, we analyze the mechanism design problem when the physician and the patient submit the claim to the payer through a reporting game. To induce truth telling by the two agents, the weak collusion-proof insurance payment mechanism is such that it is sufficient that one of them tells the truth. Moreover, we identify trade-offs of a different nature faced by the payer according to whether incentives are placed on the patient or the physician. We also derive the optimal insurance scheme for the patient and the optimal payment for the physician. Moreover, we show that if the payer is able to ask the two parties to report the diagnosis sequentially, the advantage of the veto power of the second agent allows the payer to achieve the first-best outcome. |
| Keywords: | collusion, falsification, health care insurance, physician payment. |
| JEL: | D82 I18 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:29286&r=all |
| By: | Takuya Iwasaki (Kansai University); Shota Otomasa (Kansai University); Atsushi Shiiba (Osaka University); Akinobu Shuto (The University of Tokyo) |
| Abstract: | To test the implication of WattsÂf (2003) argument that accounting conservatism increases the efficiency of executive compensation contracts, we investigate the relationship between accounting conservatism and earnings-based executive compensation contracts in Japanese firms. We focus on Japanese executive compensation practices because the demand for accounting conservatism is likely to be larger for Japanese than U.S. firms because of the predominance of earnings-based executive compensation contracts and lack of explicit compensation contracts in Japan. Consistent with our arguments, we find a positive relationship between accounting conservatism and the compensation earnings coefficient. Furthermore, this positive relationship is greater for firms with poor ex-ante information environment. These results suggest that the demand for accounting conservatism is higher for firms that use more earnings-based executive compensation contracts and have more serious ex post settling up problems. |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf370&r=all |
| By: | Bonnet, Céline; Dubois, Pierre |
| Abstract: | Using typical demand data on differentiated products markets, we show how to identify and estimate vertical contract terms modelling explicitly the buyer power of downstream firms facing two part tariff offered by the upstream firms. We consider manufacturers and retailers relationships with two part tariff with or without resale price maintenance and allow retailers to have a buyer power determined by the horizontal competition of manufacturers. Our contribution allows to recover price-cost margins at the upstream and downstream levels as well as fixed fees of two-part tariff contracts using the industry structure and estimates of demand parameters. Empirical evidence on the market for bottles of water in France shows that two part tariff contracts are used without resale price maintenance and that the buyer power of supermarket chains is endogenous to the structure of manufacturers competition. We are able to estimate total fixed fees and profits across manufacturers and retailers. |
| Keywords: | vertical contracts, two part tariff, buyer power, retailers, differentiated products. |
| JEL: | C12 C33 L13 L81 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:29303&r=all |
| By: | Alexis Louaas (Department of Economics, Ecole Polytechnique - CNRS - Polytechnique - X); Pierre Picard (Department of Economics, Ecole Polytechnique - CNRS - Polytechnique - X) |
| Abstract: | We analyze the optimal insurance coverage for high severity-low probability accidents, both from theoretical and applied standpoints. Such accidents qualify as catastrophic when their risk premium is a non-negligible proportion of the victims’ wealth, although the probability of occurrence is very small. We show that this may be the case when the individual’s absolute risk aversion is very large in the accident case. We characterize the optimal insurance contract firstly for an individual, and secondly for a firm that may be at the origin of an accident that affects the whole population. The optimal indemnity schedule converges to a limit when the probability of the accident tends to zero. In the case of corporate civil liability, this limit schedule is a straight deductible contract that corresponds to an indemnification of victims ranked in order of priority according to the severity of their losses. We also show that the size of the deductible depends on the individuals’ risk aversion and also on the cost of contingent risk capital that is required to sustain the indemnity payment, should an accident occur. The empirical part of the paper is an application of these general principles to the case of nuclear accidents. Large scale nuclear accidents are typical examples of high severity-low probability risks. We calibrate a model on French data in order to estimate the optimal liability ceiling of an electricity producer in the nuclear energy sector. We use data drawn from the cat-bond markets to estimate the cost of contingent capital for low probability events, and we show that the minimal corporate liability adopted in 2004 through the revision of the Paris Convention is probably lower than the level that would correspond to an optimal risk coverage of the population. |
| Date: | 2014–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01097897&r=all |