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on Contract Theory and Applications |
| By: | Deb, Rahul; Mitchell, Matthew; Pai, Mallesh |
| Abstract: | Motivated by markets for "expertise," we study a bandit model where a principal chooses between a safe and risky arm. A strategic agent controls the risky arm and privately knows whether its type is high or low. Irrespective of type, the agent wants to maximize duration of experimentation with the risky arm. However, only the high type arm can generate value for the principal. Our main insight is that reputational incentives can be exceedingly strong unless both players coordinate on maximally inefficient strategies on path. We discuss implications for online content markets, term limits for politicians and experts in organizations. |
| Keywords: | bad reputation; experts; relational contracting |
| JEL: | C73 D82 D86 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14408&r=all |
| By: | Anton Kolotilin (School of Economics, UNSW Business School); Hongyi (School of Economics, UNSW Business School) |
| Abstract: | We study a communication game between an informed sender and an uninformed receiver with repeated interactions and voluntary transfers. Transfers motivate the receiver’s decision-making and signal the sender’s information. Although full separation can always be supported in equilibrium, partial or complete pooling is optimal if the receiver’s decision-making is highly responsive to information. In this case, the receiver’s decision-making is disciplined by pooling extreme states, where she is most tempted to defect. |
| Keywords: | strategic communication, relational contracts |
| JEL: | C73 D82 D83 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2018-12b&r=all |
| By: | Kwadwo Osei Bonsu; Shoucan Chen |
| Abstract: | Economic theory has provided an estimable intuition in understanding the perplexing ideologies in law, in the areas of economic law, tort law, contract law, procedural law and many others. Most legal systems require the parties involved in a legal dispute to exchange information through a process called discovery. The purpose is to reduce the relative optimisms developed by asymmetric information between the parties. Like a head or tail phenomenon in stochastic processes, uncertainty in the adjudication affects the decisions of the parties in a legal negotiation. This paper therefore applies the principles of aleatory analysis to determine how negotiations fail in the legal process, introduce the axiological concept of optimal transaction cost and formulates a numerical methodology based on backwards induction and stochastic options pricing economics in estimating the reasonable and fair bargain in order to induce settlements thereby increasing efficiency and reducing social costs. |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2006.11061&r=all |
| By: | Stijn Claessens; Kenichi Ueda |
| Abstract: | We propose a simple theory suggesting that basic employment protection can improve economy-wide welfare as it mitigates a time inconsistency problem that makes a firm's promise to workers less credible. By tilting the bargaining power in renegotiations on contract terms towards workers, basic employment protection can incentivize workers to invest in firm-specific human capital and allow firms to keep operating. This contrasts to the case of rigid labor protection, which forces firms to go bankrupt too often with economic costs. We test for the effects using a quasi-natural experiment: US workers gained basic protections between the early-1970s and the mid-1990s, but in years varying by state. We find employment protection to benefit the growth of knowledge-intensive industries. We corroborate another prediction that stronger bargaining powers of workers vis-a-vis other stakeholders since contemporaneous bank branch deregulations (i.e., reduction in banks' monopoly powers) also benefit knowledge-intensive industries. Although labor and financial reforms are rarely jointly investigated, we confirm that the direct positive effect of basic employment protection prevails when correcting for (changes in) creditors' powers and vice versa. Since the findings do not maintain for R&D-intensive industries, we interpret the firm-specific human capital in our theory broadly, e.g., as for white-collar jobs. |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:tcr:wpaper:e148&r=all |