{"title":"Informal Risk Sharing with Local Information","authors":"A. Ambrus, Wayne Yuan Gao, Pau Milán","doi":"10.2139/ssrn.3220524","DOIUrl":"https://doi.org/10.2139/ssrn.3220524","url":null,"abstract":"This paper considers the effect of contracting limitations in risk-sharing networks, arising \u0000for example from observability, verifiability, complexity or cultural constraints. We \u0000derive necessary and sufficient conditions for Pareto efficiency under these constraints in \u0000a general setting, and we provide an explicit characterization of Pareto efficient bilateral \u0000transfer profiles under CARA utility and normally distributed endowments. Our model \u0000predicts that network centrality is positively correlated with consumption volatility, as \u0000more central agents become quasi-insurance providers to more peripheral agents. The proposed \u0000framework has important implications for the empirical specification of risk-sharing \u0000tests, allowing for local risk-sharing groups that overlap within the village network.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"19 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-06-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132737581","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Multi-Seller Access Pricing for Shopping Platforms: Online Appendix","authors":"Ming Gao","doi":"10.2139/ssrn.2871317","DOIUrl":"https://doi.org/10.2139/ssrn.2871317","url":null,"abstract":"This document is an appendix that accompanies the paper \"Multi-Seller Membership Pricing\". The motivation and research questions presented here are the same as the original paper. The purpose of this document is to show that, two assumptions used in the paper can be relaxed to include more general cases, without affecting the main findings and their intuition in the paper.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"77 1‐3","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132905016","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Contract Compliance Under Biased Expectations","authors":"Kerstin Grosch, Sabine Fischer","doi":"10.2139/ssrn.3580818","DOIUrl":"https://doi.org/10.2139/ssrn.3580818","url":null,"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 amplifies the effect of subjective losses on contract breach. In a treatment, we manipulate agents' overestimation exogenously and use it as an instrument to demonstrate that the reported effects are causal.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"49 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122627488","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Incentive Design for Operations-Marketing Multitasking","authors":"Tinglong Dai, Rongzhu Ke, C. Ryan","doi":"10.2139/ssrn.3235866","DOIUrl":"https://doi.org/10.2139/ssrn.3235866","url":null,"abstract":"A firm hires an agent (e.g., a store manager) to undertake both operational and marketing tasks. Marketing tasks boost demand, but for demand to translate into sales, operational effort is required to maintain adequate inventory. The firm designs a compensation plan to induce the agent to put effort into both marketing and operations while facing demand censoring (i.e., demand in excess of available inventory is unobservable). We formulate this incentive-design problem in a principal-agent framework with a multitasking agent subject to a censored signal. We develop a bang-bang optimal control approach, with a general optimality structure applicable to a broad class of incentive-design problems. Using this approach, we characterize the optimal compensation plan, with a bonus region resembling a “mast” and “sail” such that a bonus is paid when either all inventory above a threshold is sold or the sales quantity meets an inventory-dependent target. The optimal mast-and-sail compensation plan implies nonmonotonicity, where the agent can be less likely to receive a bonus for achieving a better outcome. This gives rise to an ex post moral hazard issue where the agent may “hide” inventory to earn a bonus. We show that this ex post moral hazard issue is a result of demand censoring. If available information includes a waiting list (or other noisy signals) to gauge unsatisfied demand, no ex post moral hazard issues remain. This paper was accepted by Vishal Gaur, operations management.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126467813","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Insurable Losses, Pre-filled Claims Forms and Honesty in Reporting","authors":"W. Morrison, Bradley J. Ruffle","doi":"10.2139/ssrn.3518766","DOIUrl":"https://doi.org/10.2139/ssrn.3518766","url":null,"abstract":"We design a series of laboratory experiments to investigate the effects of purchasing insurance and of pre-filled claim forms on dishonesty in loss reporting. In our experiment, participants report the outcome of privately rolling two dice where the numbers rolled map to a payoff distribution with the possibility of losses in earned income. Prior to this reporting task, participants bid for a limited number of insurance contracts which issue an indemnity payment equal to each insured individual’s reported loss. We find that dishonest reporting is significantly more prevalent among insured individuals relative to the uninsured, consistent with an ‘entitlement bias’. Further we find that prefilling the reporting form with the most probable outcome only modestly constrains dishonest reporting among both insured and uninsured individuals. We explore reasons why pre-filled forms should be applied with caution.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-01-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126342472","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Efficiency With(out) Intermediation in Repeated Bilateral Trade","authors":"R. Lamba","doi":"10.2139/ssrn.3488821","DOIUrl":"https://doi.org/10.2139/ssrn.3488821","url":null,"abstract":"This paper analyzes repeated version of the bilateral trade model where the independent payoff relevant private information of the buyer and the seller is correlated across time. Using this setup it makes the following five contributions. First, it derives necessary and sufficient conditions on the primitives of the model as to when efficiency can be attained under ex post budget balance and participation constraints. Second, in doing so, it introduces an intermediate notion of budget balance called interim budget balance that allows for the extension of liquidity but with participation constraints for the issuing authority, interpreted here as an intermediary). Third, it pins down the class of all possible mechanisms that can implement the efficient allocation with and without an intermediary. Fourth, it provides a foundation for the role of an intermediary in a dynamic mechanism design model under informational constraints. And, fifth, it argues for a careful interpretation of the \"folk proposition\" that less information is better for efficiency in dynamic mechanisms under ex post budget balance and observability of transfers.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"50 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134137464","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Theory of Agreements","authors":"Susheng Wang","doi":"10.2139/ssrn.3459572","DOIUrl":"https://doi.org/10.2139/ssrn.3459572","url":null,"abstract":"Business partners often start their cooperation with a loose and nonbinding agreement, and subsequently replace it by a strict and binding contract. This paper is the first to analyze such agreements extensively. We identify the role of information, incentives, uncertainty and expectation errors in agreements. We show that an agreement is the most efficient solution if information is symmetric, or quality is fairly uncertain, or expectation errors are large, or the firm with an information advantage contributes more to specifications, or the firm with more bargaining power contributes more to quality. Further, incentives for quality amplify the efficiency improvement of the equilibrium agreement over the equilibrium contract, and the equilibrium agreement can offer higher product quality than the equilibrium contract under certain conditions.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"25 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121971605","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Capital Misallocation and Risk Sharing","authors":"Hengjie Ai, A. Bhandari, Yuchen Chen, Chao Ying","doi":"10.2139/ssrn.3521553","DOIUrl":"https://doi.org/10.2139/ssrn.3521553","url":null,"abstract":"We develop an optimal contracting model in which limited enforcement of financial contracts generates dispersion in marginal products of capital across firms. We show that the optimal contract can be implemented using state-contingent transfers and a simple collateral constraint that limits the capital input of firms by a fraction of the financial wealth of the firm owner. Compared to models with exogenous collateral constraint and incomplete markets (for example Moll (2014)), we find that the degree of measured misallocation is increasing in the persistence of the idiosyncratic productivity shocks. Under the optimal contract, the possibility to transfer wealth from high productivity states to low productivity states allows firm owners to trade off efficient allocation of consumption against the efficient allocation of capital. We show that for reasonable values of risk aversion, insurance needs more than offset production efficiency concerns.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130216722","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Governance of Smart Contracts in Blockchain Institutions","authors":"Bronwyn E. Howell, P. Potgieter","doi":"10.2139/ssrn.3423190","DOIUrl":"https://doi.org/10.2139/ssrn.3423190","url":null,"abstract":"We consider some of the techno-economic characteristics of smart contracts relating to real-world transactions, and the effectiveness of the governance regimes in which they will operate. We find that the requirement to code the precise executable steps ex ante in smart contracts necessitates a degree of precision and foresight about potential future eventualities that is unprecedented in all but the simplest of real-world interactions. The rules-based approach necessitated by pre-programming all transactions anticipates a state where complete contracting is feasible, so is not well-suited to transactions in real-world environments where unexpected outcomes can arise. This stands in direct contrast to the well-developed principles-based governance frameworks offered under contract law and the courts, which have developed ways to specifically address issues of contractual incompleteness. Thus despite objectives for blockchain-governed institutional (or even constitutional) frameworks to operate as fully self-contained environments within which all commercial interactions can be mediated via smart contracts, the inherent incompleteness of contracts due to limits to information availability, human cognition and communication renders such objectives illusory. A role will continue to exist for the real-world contract governance institutions as a complement to blockchain governance arrangements. Smart contracts may be suitable for routine, low-value highly-standardised and easily-coded spot transactions with predetermined outcomes and executed within a short time horizon of agreement taking place. However, the more complex and unique is the transaction, the higher is the value at risk, the harder it is to anticipate and precisely specify contingencies and measure and observe outcomes, and the longer is the time frame between agreement and execution, the less likely it is that smart contracting will be more efficient than real-world contracting. Indeed, in many cases a smart contract may prove more costly to administer.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-06-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129654885","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Modifying The Carried Interest To Do What It Is Said To Do","authors":"Ludovic Phalippou","doi":"10.2139/ssrn.3333053","DOIUrl":"https://doi.org/10.2139/ssrn.3333053","url":null,"abstract":"The carried interest received by private equity fund managers (General Partners; GPs) generates some controversies. The three most debated claims are that carried interest i) aligns incentives, ii) should be treated as a capital gain for tax purposes, and iii) should not be reported as a fee charged to investors. The existence of two key principal-agent relationships within the private equity model might be at the root of these controversies. One relationship links the GP as principal and portfolio company management team as agent. In this first contract, the three claims hold true. The other relationship links fund investors (Limited Partners; LPs) as principal with the GP as agent. I show that modifying that second contract by introducing a first-loss feature and reducing significantly the catch-up rate makes the two contracts equivalent. Hence, the benefits of the limited partnership structure can co-exist in a setting where the three claims about carried interest hold true.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-02-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125956005","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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