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on Contract Theory and Applications |
| By: | Joseph Cullen; Nicolas Schutz; Oleksandr Shcherbakov |
| Abstract: | We study the social welfare implications of early termination fees in the US wireless industry. It is hypothesized that the elimination of long-term contracts at the end of 2015 was a transition from one market equilibrium to another. We use a theoretical model to illustrate that the endogenous choice of consumer switching costs by service providers does not necessarily raise firms' profits or hurt consumers. The forward-looking behavior of consumers facing switching costs results in significant downward pressure on prices. Service fees may be so low that consumers are better off and firms are worse off in an equilibrium with switching costs. Empirically, we find that without early termination fees, firms would increase prices by 2 to 5 percent, on average, resulting in an unambiguous increase in consumer surplus. Firms' profits derived from monthly service fees also increase. However, if we consider additional revenues from contract termination payments, the cost of processing these payments should be large enough for producer profits to be higher in the new equilibrium. |
| Keywords: | Econometric and statistical methods; Firm dynamics; market structure and pricing |
| JEL: | D22 L96 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:20-9&r=all |
| By: | Hitoshi Matsushima; Shunya Noda |
| Abstract: | We study the design of self-enforcing mechanisms that rely on neither a trusted third party (e.g., court, trusted mechanism designer) nor a long-term relationship. Instead, we use a smart contract written on blockchains as a commitment device. We design the digital court, a smart contract that identifies and punishes agents who reneged on the agreement. The digital court substitutes the role of legal enforcement in the traditional mechanism design paradigm. We show that, any agreement that is implementable with legal enforcement can also be implemented with enforcement by the digital court. To pursue a desirable design of the digital court, we study a way to leverage truthful reports made by a small fraction of behavioral agents. Our digital court has a unique equilibrium as long as there is a positive fraction of behavioral agents, and it gives correct judgment in the equilibrium if honest agents are more likely to exist than dishonest agents. The platform for smart contracts is already ready in 2020; thus, self-enforcing mechanisms proposed in this paper can be used practically, even now. As our digital court can be used for implementing general agreements, it does not leak the detailed information about the agreement even if it is deployed on a public blockchain (e.g., Ethereum) as a smart contract. |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:toh:dssraa:111&r=all |
| By: | Iossa, Elisabetta; Loertscher, Simon; Marx, Leslie; Rey, Patrick |
| Abstract: | Collusive schemes by suppliers often take the form of allocating customers or markets among cartel members. We analyze incentives for suppliers to initiate and sustain such a collusive schemes in a repeated procurement setting. We show that, contrary to some prevailing beliefs, staggered (versus synchronized) purchasing does not make collusion more difficult to sustain or initiate. Buyer defensive measures include synchronized rather than staggered purchasing, first-price rather than second-price auctions, more aggressive or secrete reserve prices, longer contract lengths, withholding information, and avoiding observable registration procedures. Inefficiency induced by defensive measures is an often unrecognized social cost of collusive conduct. |
| Keywords: | synchronized vs staggered purchasing; sustainability and initiation of collusion; coordinated effects |
| JEL: | D44 D82 L41 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:124177&r=all |
| By: | Melkamu Daniel , Aemiro Melkamu Daniel (CERE - the Center for Environmental and Resource Economics) |
| Abstract: | In this paper, we seek to investigate heterogeneity in households’ valuation of electricity contract attributes that reflect demand-side flexibility in the Swedish residential sector. Using stated preference data generated from a choice experiment, we estimate a mixed logit model in willingness-to-pay space and derive individual-specific conditional mean valuations for contract attributes which include various load controls and distribution of electricity consumption information. We perform a posterior analysis and identify different segments based on the monetary values households attach to the contract attributes. We find that a large proportion of households asks for substantial compensation to accept various load controls and to share their electricity consumption information. However, some households are willing to share their electricity consumption information and ask for relatively lower compensation to allow load controls. We also find that some households that accept load controls at a relatively low compensation require a sizeable compensation to share their electricity consumption information, and vice versa. From the perspective of the contract providers, these findings suggest that information-optional contracts can generate more customers than contracts that bundle households’ consumption information with various load controls. |
| Keywords: | Choice experiment; demand flexibility; direct load control; electricity contract; household heterogeneity |
| JEL: | D12 Q41 Q48 Q51 |
| Date: | 2020–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:slucer:2020_002&r=all |
| By: | Juan Pablo Atal (University of Pennsylvania); Hanming Fang (University of Pennsylvania); Martin Karlsson (CINCH, University of Duisburg-Essen); Nicolas R. Ziebarth (Cornell University) |
| Abstract: | To insure policyholders against contemporaneous health expenditure shocks and future reclassification risk, long-term health insurance constitutes an alternative to community-rated short-term contracts with an individual mandate. Relying on unique claims panel data from a large private insurer in Germany, we study a real-world long-term health insurance application with a life-cycle perspective. We show that German long-term health insurance (GLTHI) achieves substantial welfare gains compared to a series of risk-rated short-term contracts. Although, by its simple design, the premium setting of GLTHI contract departs significantly from the optimal dynamic contract, surprisingly we only find modest welfare differences between the two. Finally, we conduct counterfactual policy experiments to illustrate the welfare consequences of integrating GLTHI into a system with a “Medicare-like†public insurance that covers people above 65. |
| Keywords: | Long-Term Health Insurance, Individual Private Health Insurance, Health Care Reform |
| JEL: | G22 I11 I18 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:duh:wpaper:2001&r=all |
| By: | Fischer, Sabine; Grosch, Kerstin |
| Abstract: | Contract compliance is key for economic growth. However, determinants affecting contract breach are not yet well understood. In this paper, we focus on contract situations with a potential hold-up problem, such as contract farming agreements which are prevalent in many developing countries. We examine if agents' payoff expectations serve as a reference point affecting (non-)compliant behavior by inducing a subjective loss when the agent compares the realized payoff and the expected payoff from the contract. Results from our lab experiment in Ghana indicate that overconfident agents, i.e., agents with relatively high payoff expectations, breach more often than underconfident agents, i.e., agents with relatively low payoff expectations. Moreover, more pronounced individual loss aversion amplies the effect of subjective losses on contract breach. In a treatment, we manipulate agent's overestimation exogenously and use it as an instrument to demonstrate that the reported effectects are causal. |
| Keywords: | Agricultural and Food Policy, Institutional and Behavioral Economics |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:ags:gagfdp:302641&r=all |