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on Contract Theory and Applications |
| By: | Fischer, Christian |
| Abstract: | We study a seller's trade credit provision decision in a situation of repeated contracting with incomplete information over the buyer's payment propensity when the enforceability of formal contracts is uncertain. The payment terms of a transaction are selected in an inter-temporal trade-off between improving the quality of information acquisition and mitigating relationship breakdown risks. When contract enforcement institutions are weak, the optimal within-relationship provision dynamics of trade credit can be uniquely determined. We obtain empirical evidence showing that in developing countries the relevance of trade credit in buyers' payment schedules has risen over-proportionally in recent years. |
| Keywords: | Payment contracts, Trade credit, Trade dynamics, Relational contracts, Weak institutions |
| JEL: | D83 F34 L14 O16 |
| Date: | 2020–06–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:100891&r=all |
| By: | Garrett, Daniel F |
| Abstract: | In the context of a canonical agency model, we study the payoff implications of introducing optimally structured incentives. We do so from the perspective of an analyst who does not know the agent's preferences for responding to incentives, but does know that the principal knows them. We provide, in particular, tight bounds on the principal's expected benefit from optimal incentive contracting across feasible values of the agent's expected rents. We thus show how economically relevant predictions can be made robustly given ignorance of a key primitive. |
| Keywords: | mechanism design; Procurement; robustness |
| JEL: | D82 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14725&r=all |
| By: | Dilmé, Francesc; Garrett, Daniel F |
| Abstract: | We study relational contracting with an agent who has consumption-smoothing preferences as well as the ability to save to defer consumption (or to borrow). Our focus is the comparison of principal-optimal relational contracts in two settings. The first where the agent's consumption and savings decisions are private, and the second where these decisions are publicly observed. In the first case, the agent smooths his consumption over time, the agent's effort and payments eventually decrease with time, and the balances on his savings account eventually increase. In the second, the agent consumes earlier than he would like, consumption and the balance on savings fall over time, and effort and payments to the agent increase. Our results suggest a possible explanation for low savings rates in certain industries where compensation often comes in the form of discretionary payments. |
| Keywords: | private savings; Relational Contracts |
| JEL: | C73 J30 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14722&r=all |
| By: | ., Imelda; Fabra, Natalia |
| Abstract: | In many settings, market power gives rise to price differences across markets. While arbitrage reduces market power and price discrimination, it need not be welfare-enhancing. Instead, as shown in this paper, addressing market power directly (e.g., through forward contracts) also reduces price discrimination while improving consumers' and social welfare. Empirical evidence from the Spanish electricity market confirms our theoretical predictions. Using detailed bid data, we exploit two regulatory changes that switched from paying renewables according to variable or fixed prices, and vice-versa. Overall, we find that fixed prices (which act as forward contracts) were more effective in weakening firms' market power, even though variable prices led to less price discrimination through arbitrage. This shows that it is in general not correct to equate increased price convergence and stronger competition or enhanced effciency. |
| Keywords: | arbitrage; Forward contracts; market power; price discrimination; renewables |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14729&r=all |
| By: | Ennis, Sean; Ivaldi, Marc; Lagos, Vicente |
| Abstract: | This paper examines the impact of most favored nation (MFN) clauses on retail prices, taking advantage of two natural experiments that changed vertical contracting between hotels and major digital platforms. The broad E.U. intervention narrowed the breadth of "price parity" obligations between hotels and major Online Travel Agencies (OTAs). Direct sales by hotels to customers subsequently became relatively cheaper. Comparisons with hotel pricing outside the E.U. confirm the reduction in prices for mid-level and luxury hotels. France and Germany went further and eliminated all price-parity agreements. This stronger intervention was associated solely with a significant additional price-reducing effect for mid-level hotels in Germany. Overall, wide MFNs are associated with higher retail prices. Regulating MFNs reduced prices with primary effects coming either from the narrow price-parity intervention or, perhaps, from direct sales becoming cheaper than OTAs in both E.U. and non-E.U. countries, and, interestingly, not from complete elimination of MFNs. |
| Keywords: | Digital Platforms; Hotel Industry; Impact Evaluation; Most favored customer; Most favored nation; Online Travel Agency; Price Parity Clause |
| JEL: | K21 L14 L42 L81 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14771&r=all |