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on Contract Theory and Applications |
| By: | Liyan Shi (Einaudi Institute for Economics and Finance) |
| Abstract: | This paper assesses the aggregate effect of non-compete employment contracts, agreements that exclude employees from joining competing firms for a duration of time, in the managerial labor market. These contracts encourage firm investment but restrict manager mobility. To explore this tradeoff, I develop a dynamic contracting model in which firms use non-compete to enforce buyout payment when their managers are poached, ultimately extracting rent from outside firms. Such rent extraction encourages initial employing firms to undertake more investment, as they partially capture the external payoff, but distorts manager allocation. The privately-optimal contract, however, over-extracts rent by setting an excessively long non-compete duration. Therefore, restrictions on non-compete can improve efficiency. To quantitatively evaluate the theory, I assemble a new dataset on non-compete contracts for executives in U.S. public firms. Using the contract data, I quantify the extent that executives under non-compete are associated with a lower separation rate and higher firm investment. I also provide new empirical evidence consistent with non-compete reducing wage-backloading in the model. The calibrated model suggests that the optimal restriction on non-compete duration is close to banning non-compete. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:852&r=all |
| By: | Marielle Brunette (BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique); Stéphane Couture (MIAT INRA - Unité de Mathématiques et Informatique Appliquées de Toulouse - INRA - Institut National de la Recherche Agronomique); Anne Corcos (LEMMA - Laboratoire d'économie mathématique et de microéconomie appliquée - UP2 - Université Panthéon-Assas - Sorbonne Universités); Francois Pannequin (ENS Cachan - École normale supérieure - Cachan) |
| Abstract: | An insurer can monitor the policyholder's prevention effort when it is observable ex-post by using a contract clause. The literature on insurance contracts does not explicitly address the role of contract clauses. We examine the role of such clauses in case of self-insurance. Because of the substitutability between insurance and self-insurance, contract clauses focused on self-insurance investments could cause a possible deterrent effect on insurance demand, highlighting their puzzling nature. In a theoretical model, we examine two arguments to overcome the compulsory self-insurance clause paradox: the observability of the self-insurance investment and the role of the self-insurance clause on insurance demand. The fact that self-insurance investments are not observable ex-ante cannot justify the use of a mandatory clause. Neither the demand for insurance nor the demand for prevention is observability-dependent. Therefore, self-insurance clauses are, at best, useless, at worst, counterproductive: when binding, they reduce the size of the insurance market. |
| Keywords: | clause du contrat,auto assurance |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-02121860&r=all |
| By: | Michele Bisceglia (Toulouse School of Economics and Università di Bergamo); Jorge Padilla (Compass Lexecon); Salvatore Piccolo (Università di Bergamo, Compass Lexecon and CSEF) |
| Abstract: | We consider a three-level supply chain where a monopolistic seller distributes its product both directly through its own distribution channel and indirectly through platforms accessed by intermediaries competing for final consumers. In this setting, we examine the welfare effects of platform parity agreements, namely contractual provisions according to which the seller cannot charge different prices for the same product distributed through different platforms. We find that these agreements mitigate the marginalization problem both in a wholesale and an agency model. However, only in the former model platform parity unambiguously increases consumer surplus; in the latter, it also increases the commissions paid by the monopolist to the platforms, whereby exacerbating the marginalization problem. On the net, platform parity benefits consumers in the agency model when competition between direct and indirect distribution is sufficiently intense. Interestingly, in both models consumers' preferences are always aligned with the platforms' but not with the seller's. |
| Keywords: | Agency Model, Distribution Channels, Platform Parity Agreements, Wholesale Model. |
| JEL: | L42 L50 L81 |
| Date: | 2019–09–16 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:542&r=all |
| By: | Hengjie Ai (University of Minnesota); Anmol Bhandari (University of Minnesota); Chao Ying (University of Minnesota); Yuchen Chen (University of Minnesota) |
| Abstract: | This paper shows that factor misallocation is closely tied to the risk-sharing avenues available to firm owners. In contrast to the commonly studied bond-only economy with collateral constraints (for example Moll (2014)), we find that the degree of misallocation is increasing in persistence of the idiosyncratic risk when firms have access to state-contingent contracts. The possibility to transfer wealth from high productivity states to low productivity states allows firm owners to trade off efficient allocation of consumption against efficient allocation of capital. We show that for reasonable values of risk aversion, insurance needs more than offset production efficiency concerns and thereby generates large capital misallocation. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1215&r=all |
| By: | Laurent LAMY (CIRED, Ecole des Ponts, ParisTech.); Manasa PATNAM (IMF.); Michael VISSER (CREST; ENSAE; CRED, University of Paris 2.) |
| Abstract: | This paper develops a novel approach to estimate how contract and principal-agent characteristics influence an ex-post performance outcome when the matching between agents and principals derives from an auction process. We propose a control-function approach to account for the endogeneity of contracts and matching. This consists of, first, estimating the primitives of an interdependent values auction model - which is shown to be non-parametrically identified from the bidding data - second, constructing control functions based on the distribution of the unobserved private signals conditional on the auction outcome. A Monte Carlo study shows that our augmented outcome equation corrects well of the endogeneity biases, even in small samples. We apply our methodology to a labor market application: we estimate the effect of sports players’ auction-determined wages on their individual performance. |
| Keywords: | Econometrics of Contracts, Econometrics of Auctions; Structural Econometrics; Endogenous Matching; Polychotomous Sample Selection; Wage-Performance Elasticity. |
| JEL: | C01 C29 D44 M52 |
| Date: | 2019–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2019-15&r=all |
| By: | Joseph E. Stiglitz; Jungyoll Yun; Andrew Kosenko |
| Abstract: | We study the Rothschild-Stiglitz model of insurance markets, introducing endogenous information disclosure about insurance sales and purchases by firms and consumers. We show that a competitive equilibrium exists under unusually mild conditions, and characterize the unique equilibrium outcome. With two types of consumers the outcome is particularly simple, consisting of a pooling contract which maximizes the well-being of the low risk individual (along the zero profit pooling line) plus a supplemental (undisclosed and nonexclusive) contract that brings the high risk individual to full insurance (at his own odds). We show that this outcome is extremely robust and constrained Pareto efficient. Asymmetric equilibrium information flows with endogenous consumer disclosure are critical in supporting the equilibrium. |
| JEL: | D43 D82 D86 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26251&r=all |
| By: | Bastien Baldacci; Paul Jusselin; Mathieu Rosenbaum |
| Abstract: | We consider the problem of designing a derivatives exchange aiming at addressing clients needs in terms of listed options and providing suitable liquidity. We proceed into two steps. First we use a quantization method to select the options that should be displayed by the exchange. Then, using a principal-agent approach, we design a make take fees contract between the exchange and the market maker. The role of this contract is to provide incentives to the market maker so that he offers small spreads for the whole range of listed options, hence attracting transactions and meeting the commercial requirements of the exchange. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1909.09257&r=all |