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on Contract Theory and Applications |
| By: | Gonzalo Ruiz D. (Departamento de Economía de la Pontificia Universidad Católica del Perú) |
| Abstract: | The present paper refers to the influence of interest groups and stakeholders on government and concessionaire contractual behavior in long-term public contracts. In particular, we show how government political commitments with interest groups represent a ‘reputational investment’, which reduces the incentives to enforce the contract and increases the willingness to accept renegotiation proposals. This situation, particularly in the case of “high profile” or “politically sensitive” projects, when observed by the private concessionaire, can be exploited to capture additional quasi-rents from the exchange relationship. Using a simple model and a case study of the South Interoceanic Road Project in Peru, we show how interactions of the government with influential stakeholders, in the context of weak institutions, can create favorable conditions for private opportunistic behavior. JEL Classification-JEL: D72 , L14 , L33 , L51 |
| Keywords: | Concession, Opportunism, Stakeholder |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:pcp:pucwps:wp00456&r=cta |
| By: | Louis-Gaëtan Giraudet (Ecole des Ponts ParisTech, CIRED) |
| Abstract: | Information problems have early been suspected to be the main barrier to energy-efficiency investment. I review the vast yet piecemeal research that has been carried out since. Focusing on energy efficiency in buildings, I organize the review around the concept of credence good: just like that of auto repairs or taxi rides, the quality of energy-efficiency measures is never fully revealed to the buyer; as a result, it is subject to multiple information asymmetries. My first contribution is to distinguish symmetric-information problems from information asymmetries. The former arise when information is either incomplete or imperfect, but equally shared by contracting parties; as non-market failures, these can be addressed by technological progress and insurance markets. My second contribution is to give structure to the information asymmetries associated with energy efficiency by disentangling screening, signalling, moral hazard and price discrimination within a variety of contractual relationships involving buyers and sellers, owners and renters, and borrowers and lenders. I find evidence of information asymmetries to be compelling in landlord-tenant relationships, unclear in real estate markets, and scarce in retrofit contracting and financing. I conclude by discussing the intricacies between informational and behavioural problems in energy-efficiency decisions. |
| Keywords: | Energy-efficiency gap, Information asymmetries, Credence goods, Building energy, |
| JEL: | Q41 D82 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:fae:wpaper:2018.07&r=cta |
| By: | Blouin, Arthur (University of Toronto); Macchiavello, Rocco (London School of Economics) |
| Abstract: | This paper studies strategic default on coffee pre-financing agreements. In these common arrangements, mills finance coffee production through loans backed by forward-sales contracts with foreign buyers. We model how strategic default introduces a trade-off between insurance and counterparty risk: relative to indexed contracts, fixed-price contracts insure against price swings but create incentives to default when market conditions change. To test for strategic default, we construct contract-specific measures of unanticipated changes in market conditions by comparing spot prices at maturity with the relevant futures prices at the contracting date. Unanticipated rises in market prices increase defaults on fixed price contracts but not on priceindexed ones. We isolate strategic default by focusing on unanticipated rises at the time of delivery after production decisions are sunk. Estimates suggest that roughly half of the observed defaults are strategic. Strategic defaults are more likely in less valuable relationships which, in turn, tend to sign price-indexed contracts to limit strategic default. A model calibration suggests that strategic default causes 15.8% average losses in output, significant dispersion in the marginal product of capital and sizeable negative externalities on supplying farmers. |
| Keywords: | Strategic Default, Contractual Forms, Counterparty Risk. JEL Classification: D22, L14, G32, O16. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:cge:wacage:369&r=cta |
| By: | Stamatopoulos, Giorgos |
| Abstract: | The theory of strategic managerial delegation has recently been extended by incorporating bargaining over managerial contracts (van Witteloostuijn et.al 2007, etc). Assuming that bargaining involves only the incentive rates of managers, this line of research has shown that market outcomes (profits and social welfare) depend crucially on the intra-firm allocation of bargaining powers. In the current paper we revisit the bargaining framework assuming that negotiations involve all contractual terms (incentive rates and transfers). We show that contrary to the earlier results, the market equilibrium is independent of bargaining powers, the latter determining only the transfers. Hence the outcome of our model is identical to the outcome of the delegation model with no bargaining. |
| Keywords: | Strategic delegation; oligopoly; Nash bargaining; equivalence |
| JEL: | L13 L21 |
| Date: | 2018–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:86143&r=cta |
| By: | Jen-Wen Change (California State University, Fullerton); Simpson Zhang (Office of Financial Research) |
| Abstract: | Since the 2007-09 financial crisis, researchers have debated whether compensation plans drove excessive risk-taking or financial managers simply underestimated the risks of various investments. Through a principal-agent model with heterogeneous beliefs, we show that principals offer contracts that incentivize safe behavior when competition for managerial talent is low. However, intense competition results in contracts that incentivize risk-taking. We find that factors that increase the intensity of competition include greater search efficiency, larger project scales, and higher debt funding, all of which may be prevalent during a financial bubble. |
| Keywords: | competition, compensation constracts, overoptimism |
| Date: | 2018–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:ofr:wpaper:18-02&r=cta |
| By: | Casaburi, Lorenzo; Willis, Jack |
| Abstract: | The gains from insurance arise from the transfer of income across states. Yet, by requiring that the premium be paid upfront, standard insurance products also transfer income across time. We show that this intertemporal transfer can help explain low insurance demand, especially among the poor, and in a randomized control trial in Kenya we test a crop insurance product which removes it. The product is interlinked with a contract farming scheme: as with other inputs, the buyer of the crop offers the insurance and deducts the premium from farmer revenues at harvest time. The take-up rate for pay-at-harvest insurance is 72%, compared to 5% for the standard pay-upfront contract, and the difference is largest among poorer farmers. Additional experiments and outcomes provide evidence on the role of liquidity constraints, present bias, and counterparty risk, and find that enabling farmers to commit to pay the premium just one month later increases demand by 21 percentage points. |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12896&r=cta |