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on Contract Theory and Applications |
| By: | Biais, Bruno; Heider, Florian; Hoerova, Marie |
| Abstract: | We study the interaction between contracting and equilibrium pricing when risk- averse hedgers purchase insurance from risk-neutral investors subject to moral hazard. Moral hazard limits risk-sharing. In the individually optimal contract, margins are called (after bad news) to improve risk-sharing. But margin calls depress the price of investors' assets, affecting other investors negatively. Because of this fire-sale externality, there is too much use of margins in the market equilibrium compared to the utilitarian optimum. Moreover, equilibrium multiplicity can arise: In a pessimistic equilibrium, hedgers who fear low prices request high margins to obtain more insurance. Large margin calls trigger large price drops, confirming initial pessimistic expectations. Finally, moral hazard generates endogenous market incompleteness, raises risk premia, and induces contagion between asset classes. |
| Keywords: | Insurance; Derivatives; Moral hazard; Risk-management; Margin requirements; Contagion; Fire-sales |
| JEL: | D82 G21 G22 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:31764&r=cta |
| By: | Laura Rondi (Politecnico di Torino); Paola Valbonesi (University of Padova) |
| Abstract: | This paper studies the impact of qualification rules for entry into public procurement auctions on firm bids and contract execution, contributing to the debate about which regulations foster the efficient participation of small and medium enterprises (SMEs). Using rich and detailed microdata on all public work contracts awarded by the regional government of Valle d’Aosta from 2000 to 2008, we investigate the differences between pre-award outsourcing by temporary partnerships (TPs) and post-award outsourcing by firms in optional or mandatory subcontracting. We find that both outsourcing status and firm size affect bids and the probability of time and cost overruns. TPs bid lower prices than mandatory and large optional firms and perform well in contract execution, similar to small optional firms. Mandatory firms are more likely to exceed expected cost and are no better in timely delivery. The evidence holds when we disentangle horizontal and vertical subcontracting. Our results highlight the TPs’ advantage of freedom in choosing economic size and technical boundaries before entering the auction. |
| Keywords: | Public procurement, Regulation on entry, Vertical and horizontal subcontracting/outsourcing, SMEs, Temporary consortium, Supply chain. |
| JEL: | H57 L23 L24 D44 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0211&r=cta |
| By: | Fudenberg, Drew; Rayo, Luis |
| Abstract: | We study the design of careers by a principal who trains a cash-constrained agent, or apprentice, who is free to walk away at any time. The principal specifies time paths of knowledge transfer, effort provision, and task allocation, subject to the apprentice's continued participation. In the optimal contract, the apprentice pays for training by working for low or no wages and working inefficiently hard. The apprentice can work on both "skilled" (knowledge-complementary) and "unskilled" (knowledge-independent) tasks. If the principal specifies inefficiently much skilled effort at any time, she shortens the apprenticeship compared to its length when skilled effort is efficient. Otherwise, she specifies inefficiently much unskilled effort throughout and leaves the apprenticeship length unchanged. We then consider the effect of regulations that limit how hard the apprentice can work and how long the apprenticeship can last. |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12126&r=cta |
| By: | Joseph E. Stiglitz; Jungyoll Yun; Andrew Kosenko |
| Abstract: | This paper investigates the existence and nature of equilibrium in a competitive insurance market under adverse selection with endogenously determined information structures. Rothschild-Stiglitz (RS) characterized the self-selection equilibrium under the assumption of exclusivity, enforcement of which required full information about contracts purchased. By contrast, the Akerlof price equilibrium described a situation where the insurance firm has no information about sales to a particular individual. We show that with more plausible information assumptions - no insurance firm has full information but at least knows how much he has sold to any particular individual - neither the RS quantity constrained equilibrium nor the Akerlof price equilibrium are sustainable. But when the information structure itself is endogenous - firms and consumers decide what information about insurance purchases to reveal to whom - there always exists a Nash equilibrium. Strategies for firms consist of insurance contracts to offer and information-revelation strategies; for customers - buying as well as information revelation strategies. The equilibrium set of insurance contracts is unique: the low risk individual obtains insurance corresponding to the pooling contract most preferred by him; the high risk individual, that plus (undisclosed) supplemental insurance at his own actuarial odds resulting in his being fully insured. Equilibrium information revelation strategies of firms entail some but not complete information sharing. However, in equilibrium all individuals are induced to tell the truth. The paper shows how the analysis extends to cases where there are more than two groups of individuals and where firms can offer multiple insurance contracts. |
| JEL: | D82 D86 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23556&r=cta |