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on Contract Theory and Applications |
| By: | Calzolari, Giacomo; Denicolò, Vincenzo; Zanchettin, Piercarlo |
| Abstract: | We analyze the impact of exclusive contracts on the intensity of competition among firms that supply substitute products. Exclusive contracts would be neutral if firms priced at marginal cost and extracted buyers' rent by means of non distortionary fixed fees. We focus instead on the case in which rent extraction is costly, and hence firms distort marginal prices upwards. We show that in this case exclusive contracts are anti-competitive when the dominant firm enjoys a large enough competitive advantage over its rivals, and are pro-competitive, or neutral, when the competitive advantage is small. These effects appear as soon as marginal prices are distorted upwards, irrespective of which specific factors impede perfect rent extraction. |
| Keywords: | Antitrust; Dominant firm; Exclusive dealing; Rent extraction |
| JEL: | D42 D82 L42 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11291&r=cta |
| By: | Elias, Aptus; Gersbach, Hans; Volker, Britz |
| Abstract: | We examine the impact of so-called "Crisis Contracts" on bank managers' risk-taking incentives and on the probability of banking crises. Under a Crisis Contract, managers are required to contribute a pre-specified share of their past earnings to finance public rescue funds when a crisis occurs. This can be viewed as a retroactive tax that is levied only when a crisis occurs and that leads to a form of collective liability for bank managers. We develop a game-theoretic model of a banking sector whose shareholders have limited liability, so that society at large will suffer losses if a crisis occurs. Without Crisis Contracts, the managers' and shareholders' interests are aligned, and managers take more than the socially optimal level of risk. We investigate how the introduction of Crisis Contracts changes the equilibrium level of risk-taking and the remuneration of bank managers. We establish conditions under which the introduction of Crisis Contracts will reduce the probability of a banking crisis and improve social welfare. We explore how Crisis Contracts and capital requirements can supplement each other and we show that the efficacy of Crisis Contracts is not undermined by attempts to hedge. |
| JEL: | C79 G21 G28 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11267&r=cta |
| By: | Dougherty, John; Miranda, Mario |
| Abstract: | Previous literature suggests that weather based index insurance has the potential to greatly benefit poor rural households that are exposed to significant sources of systemic risk. This study proposes a simple model of how providing index insurance may reduce moral hazard problems inherent in microfinance contracts. Through increasing the value of the dynamic incentive of repayment, the model demonstrates that providing index insurance can increase endogenous effort choice, particularly for joint liability loans, provided that insurance premiums are sufficiently low. |
| Keywords: | Microfinance, Index Insurance, Moral Hazard, Endogenous Effort, Agricultural and Food Policy, International Development, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:236217&r=cta |
| By: | Willems, Bert (Tilburg University, Center For Economic Research); Zwart, Gijsbert (Tilburg University, Center For Economic Research) |
| Abstract: | We model the optimal regulation of continuous, irreversible, capacity expansion, in a model in which the regulated network firm has private information about its capacity costs, investments need to be financed out of the firm’s cash flows from selling network access and demand is stochastic. If asymmetric information is large, the optimal mechanism consists of a regulatory holiday for low-cost firms, and a mark-up regime for higher-cost rms. With the regulatory holiday, a firm receives the full revenue of capacity sales, and expands capacity as if it were an unregulated monopolist. Under the mark-up regime, a firm receives only a fraction of the capacity revenues, and is obliged to expand capacity whenever the price for capacity reaches a threshold. The regulatory holiday is necessary to fund information rents to the most efficient firms, which invest relatively early, as direct investment subsidies are not feasible. |
| Keywords: | regulatory holiday; real option value; asymmetric information; optimal contracts |
| JEL: | D81 D82 L52 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:b9cd661e-1707-47a2-b63a-34bab3439b8a&r=cta |
| By: | Graham, Brad; Robles, Jack |
| Abstract: | We investigate contracts between a law firm and a corporate client involved in a repeated relationship. In contrast to the previous literature pertaining to one-time interactions between clients and attorneys, we find that the contingent fee is not the best arrangement. Rather, the contingent fee is dominated by a contract which, we argue, an outside observer could not distinguish from simple hourly fee contract. This contract includes an hourly fee equal to the law firm’s opportunity cost, a lump sum, and a retention function. The lump sum payment is independent of the number of hours worked by the law firm and the outcome of the case. The repeated nature of the relationship allows the client to create a contract where the desire to maintain the relationship induces the law firm to exert the optimal level of effort in the current case. |
| Keywords: | Legal services, Contract, Contingent fee, Repeated relationship, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:vuw:vuwecf:5074&r=cta |