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on Contract Theory and Applications |
| By: | Göller, Daniel |
| Abstract: | A loss averse buyer and seller face an uncertain environment. Should they write a long-term contract or wait until the state of the world has realized? I show that simple long-term contracts perform better than insinuated in Herweg and Schmidt (2015), even though loss aversion makes renegotiation sometimes inefficient. During renegotiation, the outcome induced by the long-term contract constitutes the reference points to which the parties compare gains and losses of the renegotiated transaction. Whereas Herweg and Schmidt assume that the long-term contract is always performed, it is actually preferably that it is not in a "bad" state. This alters the threat-point in renegotiation, making it easier to renegotiate and thus improves the performance of long-term contracts. Specific performance contracts perform better than in Herweg and Schmidt but are still problematic since one can not always prevent that the contract is enforced when it should not. Option contracts perform much better since only one party has the ex post trade decision and it is thus much easier to prevent that the contract is inefficiently enforced due to loss aversion. My findings suggest that loss aversion alone cannot explain why parties sometimes abstain from writing beneficial long-term contracts, but gives important insights on how long-term contracts should be written when parties are aware they are loss averse. |
| Keywords: | Incomplete Contracts,Behavioral Contract Theory,Reference points,Holdup,Renegotiation |
| JEL: | D86 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc20:224598&r=all |
| By: | Olivier Guéant (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Iuliia Manziuk (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Jiang Pu |
| Abstract: | When firms want to buy back their own shares, they have a choice between several alternatives. If they often carry out open market repurchase, they also increasingly rely on banks through complex buyback contracts involving option components, e.g. accelerated share repurchase contracts, VWAP-minus profit-sharing contracts, etc. The entanglement between the execution problem and the option hedging problem makes the management of these contracts a difficult task that should not boil down to simple Greek-based risk hedging, contrary to what happens with classical books of options. In this paper, we propose a machine learning method to optimally manage several types of buyback contract. In particular, we recover strategies similar to those obtained in the literature with partial differential equation and recombinant tree methods and show that our new method, which does not suffer from the curse of dimensionality, enables to address types of contract that could not be addressed with grid or tree methods. |
| Keywords: | ASR contracts,Optimal stopping,Stochastic optimal control,Deep learning,Recurrent neural networks,Reinforcement learning |
| Date: | 2020–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-02987889&r=all |
| By: | Neele Balke; Thibaut Lamadon |
| Abstract: | This paper examines how employer- and worker-specific productivity shocks transmit to earnings and employment in an economy with search frictions and firm commitment. We develop an equilibrium search model with worker and firm shocks and characterize the optimal contract offered by competing firms to attract and retain workers. In equilibrium, risk-neutral firms provide only partial insurance against shocks to risk-averse workers and offer contingent contracts, where payments are backloaded in good times and frontloaded in bad times. We prove that there exists a unique spot target wage, which serves as an attraction point for smooth wage adjustments. The structural model is estimated on matched employer-employee data from Sweden. The estimates indicate that firms absorb persistent worker and firm shocks, with respective passthrough values of 27 and 11%, but price permanent worker differences, a large contributor (32%) to variations in wages. A large share of the earnings growth variance can be attributed to job mobility, which interacts with productivity shocks. We evaluate the effects of redistributive policies and find that almost 40% of government-provided insurance is undone by crowding out firm-provided insurance. |
| JEL: | E24 J31 J41 J64 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28060&r=all |
| 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. Effort cycles generate occasional large changes in earnings. These large changes are transitory, consistent with recent empirical findings. |
| JEL: | E24 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28052&r=all |
| By: | Kragl, Jenny; Bental, Benjamin |
| Abstract: | The article is concerned with understanding the impact of social preferences and wealth inequality on aggregate economic outcomes. We investigate how different manifestations of other-regarding preferences affect incentive contracts at the microeconomic level and how these in turn translate into macroeconomic outcomes. Increasing the workers' sensitivity to inequality raises effort and reduces wage costs for poor but not necessarily for rich workers. A parameterized version of the model roughly mimicking relevant key features of the industrialized world shows that, at the general equilibrium, increased initial wealth differences raise aggregate profit and output but entail distributional utility losses and increased inequality. |
| Keywords: | other-regarding preferences,incentives,general equilibrium,inequality,wealth,income,inequality aversion,competitiveness |
| JEL: | D31 D50 D63 D82 M52 M54 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc20:224547&r=all |