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on Contract Theory and Applications |
| By: | Piero Gottardi (European University Institute - Department of Economics); Jean-Marc Tallon (PSE - Paris School of Economics); Paolo Ghirardato (Collegio Carlo Alberto - Via Real Collegio 30) |
| Abstract: | This paper studies the costs and benefits of delegating decisions to superiorly informed agents, that is of adopting flexible contracts, relative to the use of rigid, non discretionary contracts. The main focus of the paper lies in the analysis of the costs of delegation, primarily agency costs, versus their benefits, primarily the flexibility of the action choice in two different environments, one with risk and one with ambiguity. We first determine and characterize the properties of the optimal flexible contract. We then show that the higher the agent's degree of risk aversion, the higher is the agency costs of delegation and the less profitable a flexible contract relative to a rigid one. When the parties have imprecise probabilistic beliefs, the agent's degree of imprecision aversion introduces another agency cost, which again reduces the relative profitability of flexible contracts. JEL Classification: D86, D82, D81. |
| Keywords: | Multiple Priors,Imprecision Aversion,Flexibility,Delegation,Agency Costs |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01238046&r=cta |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Francisco Castro (Graduate School of Business, Columbia University); Gabriel Weintraub (Graduate School of Business, Stanford University) |
| Abstract: | We study the classic sequential screening problem under ex-post participation constraints. Thus the seller is required to satisfy buyers’ ex-post participation constraints. A leading example is the online display advertising market, in which publishers frequently cannot use up-front fees and instead use transaction-contingent fees. We establish when the optimal selling mechanism is static (buyers are not screened) or dynamic (buyers are screened), and obtain a full characterization of such contracts. We begin by analyzing our model within the leading case of exponential distributions with two types. We provide a necessary and sufficient condition for the optimality of the static contract. If the means of the two types are sufficiently close, then no screening is optimal. If they are sufficiently apart, then a dynamic contract becomes optimal. Importantly, the latter contract randomizes the low type buyer while giving a deterministic allocation to the high type. It also makes the low type worse-off and the high type better-off compared to the contract the seller would offer if he knew the buyer’s type. Our main result establishes a necessary and sufficient condition under which the static contract is optimal for general distributions. We show that when this condition fails, a dynamic contract that randomizes the low type buyer is optimal. |
| Keywords: | Sequential screening, Ex-post participation constraints, Static contract, Dynamic contract |
| JEL: | C72 D82 D83 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2078r&r=cta |
| By: | Efraim Benmelech; Nittai K. Bergman |
| Abstract: | Credit market freezes in which debt issuance declines dramatically and market liquidity evaporates are typically observed during financial crises. In the financial crisis of 2008-09, the structured credit market froze, issuance of corporate bonds declined, and secondary credit markets became highly illiquid. In this paper we analyze liquidity in bond markets during financial crises and compare two main theories of liquidity in markets: (1) asymmetric information and adverse selection, and (2) heterogenous beliefs. Analyzing the 1873 financial crisis as well as the 2008-09 crisis, we find that when bond value deteriorates, bond illiquidity increases, consistent with an adverse selection model of the information sensitivity of debt contracts. While we show that the adverse-selection model of debt liquidity explains a large portion of the rise in illiquidity, we find little support for the hypothesis that opinion dispersion explains illiquidity in financial crises. |
| JEL: | G01 G12 G21 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23512&r=cta |
| By: | Hoffman, Mitchell (University of Toronto); Burks, Stephen V. (University of Minnesota, Morris) |
| Abstract: | Firms may be reluctant to provide general training if workers can quit and use their gained skills elsewhere. "Training contracts" that impose a penalty for premature quitting can help alleviate this inefficiency. Using plausibly exogenous contractual variation from a leading trucking firm, we show that two training contracts significantly reduced post-training quitting, particularly when workers are approaching the end of their contracts. Simulating a structural model, we show that observed worker quit behavior exhibits aspects of optimization (for one of the two contracts), and that the contracts increased firm profits from training and reduced worker welfare relative to no contract. |
| Keywords: | training contract, firm-sponsored general training, organizations, trucking, truck driver, truckload |
| JEL: | J24 M53 J41 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10835&r=cta |