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on Contract Theory and Applications |
| By: | Bruno Biais; Hans Gersbach; Jean-Charles Rochet; Ernst-Ludwig von Thadden; Stéphane Villeneuve |
| Abstract: | We analyze dynamic capital allocation and risk sharing between a principal and many agents, who privately observe their output. The state variables of the mechanism design problem are aggregate capital and the distribution of continuation utilities across agents. This gives rise to a Bellman equation in an infinite dimensional space, which we solve with mean-field techniques. We fully characterize the optimal mechanism and show that the level of risk agents must be exposed to for incentive reasons is decreasing in their initial outside utility. We extend classical welfare theorems by showing that any incentive-constrained optimal allocation can be implemented as an equilibrium allocation, with appropriate money issuance and wealth taxation by the principal. |
| Keywords: | Incomplete Financial Markets, Debt, Interest, Growth, Ponzi Games, Heterogeneous Agents, Political Economy |
| JEL: | E44 E62 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_412v2&r=cta |
| By: | Francesca Barigozzi (UNIBO - Alma Mater Studiorum Università di Bologna = University of Bologna); Helmuth Cremer (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | We study how workers' concern for coworkers' ability (CfCA) affects competition in the labor market. Two firms offer nonlinear contracts to a unit mass of prospective workers. Firms may differ in their marginal productivity, while workers are heterogeneous in their ability (high or low) and their taste for being employed by any of the two firms. Workers receive a utility premium when employed by the firm hiring most high-ability workers and suffer a utility loss if hired by its competitor. These premiums/losses are endogenously determined. We characterize contracts and workers' sorting into the two firms under complete and private information on workers' ability. We show that CfCA is detrimental to firms, but it benefits high-ability workers, especially when their ability is observable. In addition, CfCA exacerbates the existing distortion in high-ability workers' sorting into the two firms. |
| Keywords: | Concern for coworkers’ quality, Competition, Screening, Sorting |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04454311&r=cta |
| By: | Bertram, Justus; Ruhnke, Carsten S.; Schöndube, Jens Robert |
| Abstract: | As a new work style remote work has become an increasingly important factor for firms and their employees. Employees potentially benefit from a higher flexibility when working remotely. Firms can make use of this non-financial benefit to increase their attractiveness on the job market and to substitute financial wage payments to the employees. However, working remotely offers chances for the employees to engage in unproductive activities at the cost of productive working time. Hence, firms need to trade off the benefits against the costs in order to decide which degree of remote work is optimal. We use an agency model to examine the optimal degree of remote work and its interaction with the optimal incentive rate. Higher uncertainty in the productive outcome or higher risk aversion of the employee leads to both a lower degree of remote work and a lower incentive rate, while the effect of the employee's productivity on the degree of remote work is ambiguous. If pay-performance sensitivity is sufficiently high, an increase in the employee's productivity leads to a decrease in the degree of remote work, whereas it is the other way around for a low pay-performance sensitivity. In addition, we find that the optimal degree of remote work increases in the employee's preferred degree of remote work. While in the first-best solution the optimal degree of remote work is always higher than the preferred degree, in the second-best solution it can be higher or lower. |
| Keywords: | Remote Work, New Work Style, Agency Theory, Multi-Task Problem |
| JEL: | C02 D82 D83 J21 J22 J24 J33 L23 M51 M52 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-718&r=cta |
| By: | Martin Gregor (Institute of Economic Studies, Faculty of Social Sciences, Charles University); Beatrice Michaeli (UCLA Anderson School of Management) |
| Abstract: | In their role as initiators of new business projects, CEOs have an advantage over access to and control over project-related information. This exacerbates pre-existing agency frictions and may lead to investment inefficiencies. To counteract this challenge, incentive compensation for corporate boards (responsible for approving major projects) emerges as a critical governance tool. Our study demonstrates that the optimal compensation design requires strategically allocating a liability burden between CEOs and boards. When this burden is shifted onto the boards, shareholders reduce management rents, albeit at the expense of residual inefficiency. Our findings thus highlight that shareholders' tolerance for investment inefficiencies may be rooted in optimal compensation. We predict that contracts tolerating excessive investments are optimal under conditions of low labor market value for CEOs, severe CEO empire-building, and attractive outside options for directors. Because of structural changes associated with the reallocation of financial incentives, the non-financial characteristics of CEOs and boards may impact investment efficiency, information quality, project profits, and management rents in a non-monotonic manner. |
| Keywords: | Board monitoring, director compensation, investment inefficiency |
| JEL: | D83 D86 G30 G31 G34 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2024_12&r=cta |
| By: | Auster, Sarah (University of Bonn); Gottardi, Piero (University of Essex); Wolthoff, Ronald P. (University of Toronto) |
| Abstract: | We study the effect of diminishing search frictions in markets with adverse selection by presenting a model in which agents with private information can simultaneously contact multiple trading partners. We highlight a new trade- off: facilitating contacts reduces coordination frictions but also the ability to screen agents' types. We find that, when agents can contact sufficiently many trading partners, fully separating equilibria obtain only if adverse selection is sufficiently severe. When this condition fails, equilibria feature partial pooling and multiple equilibria co-exist. In the limit, as the number of contacts becomes large, some of the equilibria converge to the competitive outcomes of Akerlof (1970), including Pareto-dominated ones; other pooling equilibria continue to feature frictional trade in the limit, where entry is inefficiently high. Our findings provide a basis to assess the effects of recent technological innovations that have made meetings easier. |
| Keywords: | search, adverse selection, information frictions, efficiency |
| JEL: | D82 D83 J64 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16822&r=cta |