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on Contract Theory and Applications |
| By: | Christina Bannier; Eberhard Feess; Natalie Packham; Markus Walzl |
| Abstract: | This paper examines the effect of imperfect labor market competition on the efficiency of compensation schemes in a setting with moral hazard and risk-averse agents, who have private information on their productivity. Two vertically differentiated firms compete for agents by offering contracts with fixed and variable payments. The superior firm employs both agent types in equilibrium, but the competitive pressure exerted by the inferior firm has a strong impact on contract design: For high degrees of vertical differentiation, i.e. low competition, low-ability agents are under-incentivized and exert too little effort. For high degrees of competition, high-ability agents are over-incentivized and bear too much risk. For a range of intermediate degrees of competition, however, agents' private information has no impact and both contracts are second-best. Interim efficiency of the least-cost separating allocation in the inferior firm is a sufficient condition for equilibrium existence. If this is violated, there can only be equilibria where the inferior firm ''overbids'', i.e. where it would not break even when attracting both agent types. Adding horizontal differentiation allows for pure-strategy equilibria even when there would be no equilibrium without overbidding in the pure vertical model, but equilibria with overbidding fail to exist. |
| Keywords: | Incentive compensation, screening, imperfect labor market competition, vertical differentiation, horizontal differentiation, risk aversion |
| JEL: | D82 D86 J31 J33 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2016-20&r=cta |
| By: | R. Vijay Krishna (Duke University); Shiming Fu (University of Rochester) |
| Abstract: | This paper studies a dynamic agency model in which the agent privately observes the firm's cash flows that are subject to persistent shocks. We characterize the optimal contract by continuation utilities contingent on the agent's report today and tomorrow. The optimal contract can be implemented by a contingent credit line, stock options, and equity. In contrast to the iid case, we find: (i) investment is possibly efficient in the constrained firm, and is varying with cash flow in the unconstrained firm; (ii) the firm possibly experiences longer time of being financially constrained; (iii) the agent receives cash payment less than what he can divert from cash flow and investors hold more equity stake; (iv) compensation to the agent is via stock options and equity, the combination of which depends on persistence level; (v) firm credit line limits are contingent on compliance with a cash flow covenant and are history dependent. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:89&r=cta |
| By: | Stephane Verani (Federal Reserve Board) |
| Abstract: | Which financial frictions matter in the aggregate? This paper presents a general equilibrium model in which entrepreneurs finance a firm with a long-term contract. The contract is constrained efficient because firm revenue is costly to monitor and entrepreneurs may default. The cost of monitoring firms and the entrepreneurs' outside options determine the significance of moral hazard relative to limited enforcement for financial contracting. Calibrating the model to the U.S. economy, I find that the relative welfare loss from financial frictions is about 5 percent in terms of aggregate consumption with moral hazard, while it is 1 percent with limited enforcement. Reforms designed to strengthen contract enforcement increase aggregate consumption in the short-run, but their long-run effects are modest when monitoring costs are high. Weak contract enforcement contribute to aggregate fluctuations by amplifying the effect of aggregate technological shocks, but moral hazard does not. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:4&r=cta |
| By: | Chemla, Gilles; Tinn, Katrin |
| Abstract: | This paper examines the role of reward-based crowdfunding in learning about demand and improving investment decisions. The information gathered while raising funds from consumers provides firms with a real option to invest if demand is sufficiently high. Despite moral hazard problems stemming from the firms' ability to divert the funds raised, all-or-nothing schemes are nearly as efficient as frictionless surveys and full money-back guarantees. Dominant platforms adopt features such as limited campaign length and transparency between backers, which are essential to overcome moral hazard. Our results are consistent with stylized facts and provide new testable implications. |
| Keywords: | Kickstarter; learning; moral hazard; real options; Reward-based crowdfunding; uncertainty |
| JEL: | D80 G30 L14 L26 O30 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11363&r=cta |
| By: | Aghadadashli, Hamid; Dertwinkel-Kalt, Markus; Wey, Christian |
| Abstract: | We re-examine the Nash bargaining solution when an upstream and a downstream firm bargain over a linear input price. We show that the profit sharing rule is given by a simple and instructive formula which depends on the parties' disagreement payoffs, the profit weights in the Nash-product and the elasticity of derived demand. A downstream firm's profit share increases in the equilibrium derived demand elasticity which in turn depends on the final goods' demand elasticity. Our simple formula generalizes to bargaining with N downstream firms when bilateral contracts are unobservable. |
| Keywords: | Nash Bargaining,Demand Elasticity |
| JEL: | L13 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:224&r=cta |