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on Contract Theory and Applications |
| By: | Antoni Cunyat Cunyat (Universitat de València) |
| Abstract: | We consider a competitive labor market with moral hazard and adverse selection where firms employ teams of two workers. There exist two types of workers: selfish workers and motivated workers. Selfish workers only respond to monetary incentives. Motivated workers not only respond to monetary incentives but their behavior is also driven by intrinsic motivation. However, if a firm chooses an output-based reward system, their intrinsic motivation is undermined. We obtain that self-selection into contracts separating workers based on their motivation is feasible, provided that the crowding out e¿ect is powerful enough. More importantly, all firms have expected positive profits. Our model produces in this case heterogeneity at the firm level. |
| Keywords: | intrinsic motivation, adverse selection, competition |
| JEL: | J33 D82 D86 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2016-06&r=cta |
| By: | David Martimort (Paris School of Economics-EHESS); Aggey Semenov (Department of Economics, University of Ottawa); Lars Stole (University of Chicago, Booth School of Business) |
| Abstract: | We characterize the complete set of equilibrium allocations to intrinsic common agency screening games as the set of solutions to self-generating optimization programs. This analysis is performed both for continuous and discrete two-type models. These programs, in turn, can be thought of as maximization problems faced by a fictional surrogate principal with a simple set of incentive constraints that embed the non-cooperative behavior of principals in the underlying game. For the case of continuous types, we provide a complete characterization of equilibrium outcomes for regular environments by relying on techniques developed elsewhere for aggregate games and mechanism design problems with delegation. Those equilibria may be non-differentiable and/or exhibit discontinuities. Among those allocations, we stress the role the maximal equilibrium exhibits a n-fold distortion due to the principals' non-cooperative behavior. It is the unique equilibrium which is implemented by a tariff satisfying a biconjugacy requirement inherited from duality in convex analysis. This maximal equilibrium may not be the most preferred equilibrium allocation from the principals' point of view. We perform a similar analysis in the case of a discrete two-type model. We select within a large set of equilibria by imposing the same requirement of biconjugacy on equilibrium tariffs. Those outcomes are limits of equilibria exhibiting much bunching in nearby continuous type models which fail to be regular and require the use of ironing procedures. |
| Keywords: | Intrinsic common agency, aggregate games, mechanism design with delegation, duality, ironing procedures |
| JEL: | D82 D86 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ott:wpaper:1618e&r=cta |
| By: | Susanna Gallani (Harvard Business School, Accounting and Management Unit) |
| Abstract: | Effective design of executive compensation contracts involves choosing and weighting performance measures, as well as defining the mix between fixed and incentive-based pay components, with a view to fostering talent retention and goal congruence. The variability in compensation design observed in practice is significantly lower than it would be predicted by contracting theory. This is likely due to indirect constraining pressures, which cannot be completely explained by industry affiliation or peer group membership. I posit that network connections involving corporate boards operate as a conduit for these pressures. Using information disclosed in proxy statements of publicly traded companies, and a vectorial approach to measure compensation similarity, I predict and find that firms that are connected by board interlocks, hiring the same compensation consulting firm, or sharing a blockholder, exhibit a higher degree of similarity in the design of executive compensation contracts than what would be predicted by similarities in organizational characteristics. The relative prominence of the connectors within the respective networks moderates the network effects on the degree of compensation similarity. Finally, I show that the market responds positively to compensation similarity, although it is associated with excess CEO compensation. |
| Keywords: | Compensation design, Board interlocks, Compensation consultants, Blockholders, Network centrality. |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:16-019&r=cta |
| By: | Grochulski, Borys (Federal Reserve Bank of Richmond); Zhang, Yuzhe (Texas A&M University) |
| Abstract: | In this paper, we show that whenever the agent's outside option is nonzero, the optimal contract in the continuous-time principal-agent model of Sannikov (2008) is reflective at the lower bound. This means the agent is never terminated or retired after poor performance. Instead, the agent is asked to put zero effort temporarily, which brings his continuation value up. The agent is then asked to resume effort, and the contract continues. We show that a nonzero agent's outside option arises endogenously if the agent is allowed to quit and find a new firm (after a random search time of finite expected duration). In addition, we find new dynamics of the reflection at the lower bound. In the baseline model, the dynamics of the reflection are slow, as in Zhu (2013), i.e., the zero-action is used often. However, if the agent's disutility from the first unit of effort is zero, which is a standard Inada condition, or if his utility of consumption is unbounded below, the reflection becomes fast, i.e., the zero-effort action is used seldom. |
| Date: | 2016–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:16-14&r=cta |
| By: | Simon Dietz; Oliver Walker |
| Abstract: | Many insurance contracts are contingent on events such as hurricanes, terrorist attacks or political upheavals, whose probabilities are ambiguous. This paper offers a theory to underpin the large body of empirical evidence showing that higher premiums are charged under ambiguity. We model a (re)insurer who maximises profit subject to a survival constraint that is sensitive to the range of estimates of the probability of ruin, as well as the insurer’s attitude towards this ambiguity. We characterise when one book of insurance is more ambiguous than another and general circumstances in which a more ambiguous book requires at least as large a capital holding. We subsequently derive several explicit formulae for the price of insurance contracts under ambiguity, each of which identifies the extra ambiguity load. |
| Keywords: | ambiguity; ambiguity aversion; ambiguity load; capital requirement; catastrophe risk; insolvency; insurance; more ambiguous; reinsurance; ruin; uncertainty; Solvency II |
| JEL: | D81 G22 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:68469&r=cta |
| By: | Billette de Villemeur, Etienne; Ruble, Richard; Versaevel, Bruno |
| Abstract: | We develop a model of investment in duopoly with asymmetric costs of innovating and imitating and endogenous firm roles. Dynamic competition involves either attrition or preemption, the former being likelier with high demand growth and uncertainty. Industry value is maximized when firms neither stall nor hasten entry, and we show that social welfare has local maxima in both the attrition and preemption ranges. In all cases the socially optimal cost of imitation is positive. Attrition is optimal if consumer surplus rises sufficiently under duopoly, whereas with static business-stealing, preemption is optimal if discounting is important enough. Finally we discuss endogenous entry barriers and contracting, finding that firms are more likely to rely on secrecy and patents at low imitation costs and that simple licensing schemes are welfare improving. |
| Keywords: | Dynamic oligopoly; Knowledge spillover; Real options |
| JEL: | G31 L13 O33 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:75465&r=cta |
| By: | Benoît LE MAUX (CREM-CNRS and Condorcet Center, University of Rennes 1, France); Sarah NECKER (University of Freiburg, Walter-Eucken Institute, Deutschland); Yvon ROCABOY (CREM-CNRS and Condorcet Center, University of Rennes 1, France) |
| Abstract: | We develop a theory of the evolution of scientific misbehavior. Our empirical analysis of a survey of scientific misbehavior in economics suggests that researchers’ disutility from cheating varies with the expected fraction of colleagues who cheat. This observation is central to our theory. We develop a one-principal multi-agent framework in which a research institution aims to reward scientific productivity at minimum cost. As the social norm is determined endogenously, performance-related pay may not only increase cheating in the short run but can also make cheat-ing increasingly attractive in the long run. The optimal contract thus depends on the dynamics of scientific norms. The premium on scientific productivity should be higher when the transmission of scientific norms across generations is lower (low marginal peer pressure) or the principal cares little about the future (has a high discount rate). Under certain conditions, a greater probability of detection also increases the optimal productivity premium. |
| Keywords: | Economics of Science, Contract Theory, Scientific Misbehavior, Social Norms |
| JEL: | A11 A13 K42 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cccrwp:2016-03-ccr&r=cta |