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on Contract Theory and Applications |
| By: | Ohnishi, Kazuhiro |
| Abstract: | This paper considers a quantity-setting oligopoly model with complementary goods where labour-managed firms are allowed to offer wage-rise contracts as a strategic commitment. The following two stages are considered. In the first stage, each firm independently decides whether or not to adopt a wage-rise contract as a strategic commitment device. In the second stage, each firm independently chooses and sells its actual output. The paper analyses the equilibrium of the labour-managed oligopoly model. |
| Keywords: | Cournot competition; Labour-managed oligopoly; Wage-rise contract; Complementary goods |
| JEL: | C72 D21 L13 |
| Date: | 2018–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:88235&r=cta |
| By: | Murat Celik (University of Toronto); Xu Tian (University of Toronto) |
| Abstract: | Whether a CEO manages the innovation efforts of the firm in line with shareholder preferences has a substantial impact on market value and firm growth, which in turn influence aggregate productivity growth and welfare. Using data on U.S. public firms, we find that (i) firms with better corporate governance tend to adopt highly incentivized contracts rich in stock options; and (ii) such contracts are more likely to lead to disruptive innovations -- patented inventions that are in the upper tail of the distribution in terms of quality and originality. We develop and estimate a new dynamic general equilibrium model of firm-level innovation with agency frictions and endogenous determination of executive contracts. The model is used to study the joint dynamics of corporate governance, managerial compensation, and disruptive innovations. Better corporate governance can reduce the influence of the CEO in the determination of the compensation structure. This leads to more incentivized contracts and boosts innovation, with substantial benefits for the shareholders, as well as the broader economy through knowledge spillovers. Shutting down the agency frictions leads to an increase in long-run output growth, which translates into a significant welfare gain in consumption equivalent terms. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:590&r=cta |
| By: | Murooka, Takeshi (Osaka University); Schwarz, Marco (University of Innsbruck) |
| Abstract: | Firms often set long notice periods when consumers cancel a contract, and sometimes do so even when the costs of changing or canceling the contract are small. We investigate a model in which a firm offers a contract to consumers who may procrastinate canceling it due to naive present-bias. We show that the firm may set a long notice period to exploit naive consumers. |
| Keywords: | notice periods; procrastination; present bias; time inconsistency; consumer naivete; |
| JEL: | D04 D18 D21 D40 D90 L51 |
| Date: | 2018–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:109&r=cta |
| By: | Vasco Carvalho (U of Cambridge); Mirko Draca (University of Warwick) |
| Abstract: | US government spending since World War II has been characterized by large investments in defense-related high-tech goods and services and R&D. In turn, this means that the Department of Defense (DoD) has had a large role in funding corporate innovation in the US. This paper (i) quantifies the impact of military procurement spending on corporate innovation by publicly listed firms and (ii) shows that DoD impact on innovation was not limited to the winners of defense contracts but instead cascaded through the supply chainof DoD contractors via indirect market size effects, working through firm-to-firm input linkages. We use a database of detailed, historical procurement contracts for all Department of Defense (DoD) prime contracts since 1966. Product-level spending shifts are used as a source of exogenous variation in firm-level procurement receipts. We combine this data with information on the supply chain linkages of publicly listed firms. Our estimates indicate that defense procurement has a positive direct impact on patenting and R&D investment, with an elasticity of approximately 0.07 across both measures of innovation for DoD contractors. Further, our estimates imply that the derived demand for inputs following the award of a DoD contract constitutes a large indirect market size effect for the suppliers of DoD contractors. These indirect market size effects in turn induce innovation cascades working up the supply chain. We find that the elasticity of innovation outcomes to indirect DoD market size shocks is about half of that estimated for direct contractors but affects a much larger number of firms, increasing the effect of defense spending on aggregate innovation by at least 20%. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1322&r=cta |