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on Contract Theory and Applications |
| By: | Boyan Jovanovic; Julien Prat |
| Abstract: | Cyclical patterns in earnings can arise when contracts between firms and their workers are incomplete, and when workers cannot borrow or lend so as to smooth their consumption. Earnings cycles generate occasional large changes in earnings, consistent with some recent empirical findings. At the calibrated parameter values, financial constraints promote investment in reputation – an intangible capital form – in contrast to their documented inhibiting effect on investment in tangible capital. |
| JEL: | D31 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25252&r=cta |
| By: | Johannes Muthers; Toker Doganoglu (University Würzburg); Firat Inceoglu (University Würzburg) |
| Abstract: | We introduce a fairly general licensing model with an endogenous industry structure – in terms of number of active firms – and general licensing contracts. We show that when the patentee can employ contracts that can condition on market entry or price, it can implement an outcome that yields monopoly profits by awarding the license to a single firm. Furthermore, when the patentee can only use contracts based on the quantities of the licensees, it still captures the entire market via a single licensee, albeit not at the monopoly price. Commonly assumed two-part tariff contracts cannot duplicate this last outcome and yield lower profits. We discuss the welfare implications of various contractual schemes. |
| Keywords: | Patent licensing, free entry, quantity competition. |
| JEL: | D45 K11 L11 L13 L21 L41 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2018_12&r=cta |
| By: | Björn Bartling; Ernst Fehr; David B. Huffman; Nick Netzer |
| Abstract: | Trust affects almost all human relationships – in families, organizations, markets and politics. However, identifying the conditions under which trust, defined as people’s beliefs in the trustworthiness of others, has a causal effect on the efficiency of human interactions has proven to be difficult. We show experimentally and theoretically that trust indeed has a causal effect. The duration of the effect depends, however, on whether initial trust variations are supported by multiple equilibria. We study a repeated principal-agent game with multiple equilibria and document empirically that an efficient equilibrium is selected if principals believe that agents are trustworthy, while players coordinate on an inefficient equilibrium if principals believe that agents are untrustworthy. Yet, if we change the institutional environment such that there is a unique equilibrium, initial variations in trust have short-run effects only. Moreover, if we weaken contract enforcement in the latter environment, exogenous variations in trust do not even have a short-run effect. The institutional environment thus appears to be key for whether trust has causal effects and whether the effects are transient or persistent. |
| Keywords: | trust, causality, equilibrium selection, belief distortions, incomplete contracts, screening, institutions |
| JEL: | C91 D02 D91 E02 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7324&r=cta |
| By: | Emanuel Ornelas; John L. Turner; Grant Bickwit |
| Abstract: | We study how a preferential trade agreement (PTA) affects international sourcing decisions, aggregate productivity and welfare under incomplete contracting and endogenous matching. Contract incompleteness implies underinvestment. That inefficiency is mitigated by a PTA, because the agreement allows the parties in a vertical chain to internalize a larger return from the investment. This raises aggregate productivity. On the other hand, the agreement yields sourcing diversion. More efficient suppliers tilt the tradeoff toward the (potentially) beneficial relationship-strengthening effect; a high external tariff tips it toward harmful sourcing diversion. A PTA also affects the structure of vertical chains in the economy. As tariff preferences attract too many matches to the bloc, the average productivity of the industry tends to fall. When the agreement incorporates “deep integration” provisions, it boosts trade flows, but not necessarily welfare. Rather, “deep integration” improves upon “shallow integration” if and only if the original investment inefficiencies are serious enough. On the whole, we offer a new framework to study the benefits and costs from preferential liberalization in the context of global sourcing. |
| Keywords: | regionalism, hold-up problem, sourcing, trade diversion, matching, incomplete contracts |
| JEL: | F13 F15 D23 D83 L22 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7327&r=cta |