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on Contract Theory and Applications |
| By: | Joseph E. Stiglitz |
| Abstract: | The economics of information has constituted a revolution in economics, providing explanations of phenomena that previously had been unexplained and upsetting longstanding presumptions, including that of market efficiency, with profound implications for economic policy. Information failures are associated with numerous other market failures, including incomplete risk markets, imperfect capital markets, and imperfections in competition, enhancing opportunities for rent seeking and exploitation. This paper puts into perspective nearly a half century of research, including recent advances in understanding the implications of imperfect information for financial market regulation, macro-stability, inequality, and public and corporate governance; and in recognizing the endogeneity of information imperfections. It explores the consequences of recent advances in technology and the policy challenges and opportunities they present for competition policy and policies regarding privacy and transparency. The paper notes the role that information economics played in stimulating other advances in economics, including contract theory and behavioral economics. It reinvigorated institutional economics, showing how institutions mattered, in some cases explaining institutional features that could not be well-understood in the conventional paradigm, and in others showing how institutional responses to market failures might or might not be welfare enhancing. The paper argues that the new paradigm provides a markedly different, and better, lens for looking at the economy than the older perfect markets competitive paradigm. |
| JEL: | B21 D82 D83 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23780&r=cta |
| By: | Gülen Karakoç (Università di Milano Bicocca); Marco Pagnozzi (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università di Bergamo and CSEF) |
| Abstract: | A manufacturer designs a dynamic contract with a retailer who is privately informed about demand and faces competition by an integrated entrant in a second period. Since the entrant only observes demand after entry and demand is correlated across periods, information about past demand affects the entrant’s production. We analyze the incentives of the incumbent players to share information with the entrant and show that the retailer benefits from transparency, but the manufacturer does not. Contrary to what intuition suggests, transparency with an integrated entrant harms consumers. When the entrant is not an integrated firm, whether transparency benefits consumers depends on the degree of demand persistency. |
| Keywords: | Dynamic Adverse Selection, Entry, Information Sharing, Transparency, Vertical Contracting |
| JEL: | D40 D82 D83 L11 |
| Date: | 2017–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:482&r=cta |
| By: | Matthias Fahn (Department of Economics, Johannes Kepler University Linz, Austria); Nicolas Klein |
| Abstract: | We analyze a relational contracting problem, in which the principal has private information about the future value of the relationship. In order to reduce bonus payments, the principal is tempted to claim that the value of the future relationship is lower than it actually is. To induce truth-telling, the optimal relational contract may introduce distortions after a bad report. For some levels of the discount factor, output is reduced by more than would be sequentially optimal. This distortion is attenuated over time even if prospects remain bad. Our model thus provides an alternative explanation for indirect short-run costs of downsizing. |
| Keywords: | Self-Control Problems, Teamwork, Relational Contracts. |
| JEL: | L22 L23 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2017_14&r=cta |
| By: | Calzolari, Giacomo; Felli, Leonardo; Koenen, Johannes; Spagnolo, Giancarlo; Stahl, Konrad |
| Abstract: | Using unique data from buyer-supplier relationships in the German automotive industry, we unveil a puzzle by which more trust in a relationship is associated with higher idiosyncratic investment, but also more competition. We develop a theoretical model of repeated procurement with non-contractible, buyer-specifi c investments rationalizing both observations. Against the idea that competition erodes rents needed to build trust and sustain relationships, we infer that trust and competition tend to go hand in hand. In our setting trust and rents from reduced supplier competition behave like substitutes, rather than complements as typically understood. |
| Keywords: | Competition; Hold-up Problem; Innovation; Management Practices; Procurement; Relational Contracts; Specific Investment; Supply Chains; Trust |
| JEL: | D22 D86 L22 L62 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12267&r=cta |
| By: | Ioannis N. Pinopoulos (Department of Economics, University of Macedonia) |
| Abstract: | We study upstream horizontal mergers when one of the merging parties is a vertically integrated firm. Under upstream cost symmetry and observable contracting, we demonstrate that such type of horizontal mergers always harm consumers through a vertical partial foreclosure effect. Under observable contracting but upstream asymmetric costs, we show that overall consumer surplus may increase due to the merger even though input prices increase and some consumers are worse of. Under upstream cost symmetry but unobservable contracting, we find that consumers may be better off as a result of the merger even in the absence of exogenous cost-synergies between the merging firms. In all cases under consideration, the merger is always profitable for the merging parties. |
| Keywords: | Vertical relations; vertical integration; horizontal mergers; consumer surplus. |
| JEL: | L11 L13 L41 L42 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:mcd:mcddps:2017_07&r=cta |
| By: | Jaedo Choi (University of Michigan, Ann Arbor); Yun Jeong Choi (Yonsei University); Minki Kim (University of California, San Diego) |
| Abstract: | We investigate a vertically integrated theater's contract and screen allocation decisions in the movie industry characterized by quality unpredictability, price uni- formity, and revenue-sharing contracts. Based on a simple theoretical model that describes the decisions of theaters and movie distributors, we derive two mecha- nisms of foreclosure behaviors: selection and allocation foreclosure. Our empirical results suggest that integrated theaters not only impose a higher quality standard for movies from independent distributors at contracts but also screen their aliated movies more even after contract. Vertically integrated theaters' favoritism toward its aliated movies are more pronounced at company-owned theaters than franchised theaters. Further, we also nd integrated theaters' favorable treats for their rival movies compared to independent movies as well as non-linearity of the foreclosure e ects across movie quality and seasonality. |
| Keywords: | Endogenous Product Characteristics, Movie Industry, Quality Unpre- dictability, Revenue-Sharing Contract, Vertical Integration |
| JEL: | L13 L22 L40 L82 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:yon:wpaper:2017rwp-107&r=cta |