Long-Term or Short-Term Managerial Incentive Contracts

This paper deals with the strategic role of the temporal dimension of contracts in a duopoly market. Is it better for a firm to sign long-term incentive contracts with managers or short-term contracts? For the linear case, with strategic substitutes (complements) in the product market, the incentive variables are also strategic substitutes (complements). It is shown that a long-term contract makes a firm a leader in incentives, while a short-term contract makes it a follower. We find that, under Bertrand competition, in equilibrium one firm signs a long-term contract and the other firm short-term incentive contracts; however, under Cournot competition, the dominant strategy is to sign long-term incentive contracts.     

The extent,motivation, and effect of tying in franchise contracts

Tying in franchise contracts has been the subject of considerable antitrust litigation and theoretical analysis. Tying can enhance efficiency by increasing standardization and reducing monitoring costs, or it can be used with market power for price discrimination. In this paper, I report on the extent of tying among restaurant franchisors and test whether it is motivated by efficiency or market power considerations. The results show that the use of tying is not affected by market share or outlet share in various industry sectors, but it is affected by equipment required and by business strategy. The results are weakly supportive of efficiency and not supportive of market power. Copyright © 2000 John Wiley & Sons, Ltd.     

Bank capital regulation,loan contracts,and corporate investment

This paper studies the link between bank capital regulation, bank loan contracts and the allocation of corporate resources across firms’ different business lines. Credit risk is lower when firms write contracts that oblige them to invest mainly into projects with highly tangible assets. We argue that firms have an incentive to choose a contract with overly safe and thus inefficient investments when intermediation costs are increasing in banks’ capital-to-asset ratio. Imposing minimum capital adequacy for banks can eliminate this incentive by putting a lower bound on financing costs.     

The intensity of incentives in firms and markets: Moral hazard with envious agents

While most market transactions are subject to strong incentives, transactions within firms are often not explicitly incentivized. This paper offers an explanation for this observation based on the assumption that agents are envious and suffer utility losses if others receive higher wages. We analyze the impact of envy on optimal incentive contracts in a general moral hazard model and isolate the countervailing effects of envy on the costs of providing incentives. We show that envy creates a tendency towards flat-wage contracts if agents are risk-averse and there is no limited liability. Empirical evidence suggests that social comparisons are more pronounced among employees within firms than among individuals that interact in markets. Flat-wage contracts are then more likely to be optimal in firms.     

Length of residence discounts,turnover, and demand elasticity. Should long-term tenants pay less than new tenants?

Previous academic work on rental contracts has predicted that landlords will attempt to minimize turnover costs by giving discounts to long-term tenants. If long-term tenants have less elastic demand than short-term tenants, however, landlords might prefer to give discounts to short-term tenants. A model is developed in this paper in which landlords take account of both turnover costs and demand elasticity. Evidence from a survey of apartment managers is consistent with the model and shows that length-of-residence discounts are less common than discounts on the first month’s rent for new tenants.     

Collateral amplification under complete markets

This paper examines the robustness of the Kiyotaki–Moore collateral amplification mechanism to the existence of complete markets for aggregate risk. We show that, when borrowers can hedge against aggregate shocks at fair prices, the volatility of endogenous variables becomes identical to the first best in the absence of credit constraints. The collateral amplification mechanism disappears.To motivate the limited use of contingent contracts, we introduce costs of issuing contingent debt and calibrate them to match the liquidity and safety premia the data. We find that realistic costs of state contingent market participation can rationalize the predominant use of uncontingent debt. Amplification is restored in such an environment.     

Information, Control, and Organizational Structure

This paper investigates how a designer of an organization (referred to as the regulator) should organize a production activity in which two different units produce components and where each unit has private information about its costs. Three organizational structures are analyzed. In the first (informational consolidation), the regulator contracts with a consolidated unit that produces both components. In the second (informational decentralization), the regulator independently contracts with the producer of each component. In the third (informational delegation), the regulator contracts with one of the units, which in turn subcontracts with the other. In each case, the regulator's optimal mechanism consisting of payment and output schedules is fully characterized. Informational consolidation and informational decentralization yield different output schedules. Under informational decentralization, the optimal output schedule may not depend on the sum of the marginal costs of each component, but when it does, the regulator strictly prefers informational consolidation to informational decentralization. Informational delegation is shown to be equivalent to informational decentralization when the regulator can observe the contracting between the units.     

信息披露和证券交易中的合谋行为分析

证券市场中各市场主体之间的合谋行为会产生虚假信息,扭曲市场价格,损害投资者利益和市场效率。研究市场中的合谋行为对建立完善的市场运作和管理机制具有重要的理论意义和现实意义。通过对市场交易过程和信息披露过程中合谋行为的分析,揭示市场机制设计中各可控外生性变量的调控方向和力度。研究表明,在存在监管合谋的情况下,处罚的效果是不确定的,而奖励机制可以有效的减少合谋的发生。     

Relational Contracting in Partnerships

When performance is not verifiable, firms in a long-term relationship may rely on incentive contracts that are self-enforced or "relational." This paper studies the optimal design and performance of relational contracts in partnerships such as joint ventures or buyer-seller alliances. Optimal contracts look the same in each period as long as the relationship continues, but may require termination of the relationship after bad outcomes. Payments between the partners depend on their relative performance. In the special case of bilateral trade with specific investments, optimal relational contracting results in a price that varies with cost and demand conditions but is more stable than under spot market bargaining. Parallels are drawn with "Japanese style" subcontracting.     

Contractual structures and consumer misperceptions

We analyze how firms can design contracts to strategically induce consumer misperceptions. A fraction of consumers is naive and underestimates the costs of claiming a warranty payment in the event of product breakdown. This leads to an inference error that makes consumers prone to overpredict product quality, which a firm can profitably exploit. The channel persists under different market structures and can reduce the quality provision to sophisticated consumers. We argue that our results apply more generally to cases in which consumers are inattentive or illiterate with respect to contract fine print, and provide supporting evidence from TV infomercials.     

Managerial expertise,learning potential and dynamic incentives: get more for less?

In this paper the impact of ability and learning potential on incentive contracts is analyzed. A central feature of the model is that the true ability will not be revealed. The learning potential of an agent is modeled as the magnitude of impact on the agent's expected ability that learning‐by‐doing has in a given task. Absent a managerial labor market, depending on an agent's learning potential, a monotone or non‐monotone pay structure may be optimal. The second important result is that using agents' ability distributions as inputs to information systems, higher learning potentials lead to less costly information systems, i.e. actions can be implemented at lower costs. Additionally, it is proven that the criteria cost minimization and value maximization are equivalent in the model's context. Copyright © 2007 John Wiley & Sons, Ltd.     

Wages,implicit contracts,and the business cycle: Evidence from a European panel

We study the joint behavior of hours and wages over the business cycle in a unique panel of 13 European countries, and document significant history dependence in wages. Workers who experience favorable market conditions during their tenure on the job have higher wages, and work fewer labor hours. Unobserved differences in productivity, such as varying job quality, or match-specific productivity are not likely to explain this variation. The results instead point to the importance of contractual arrangements in wage determination. In economies with decentralized bargaining practices, such arrangements resemble self-enforcing insurance contracts with one-sided commitment (by the employer). On the other hand, in countries with strong unions and centralized wage bargaining, wage behavior is better approximated by full-commitment insurance contracts. The co-movement of hours and wages further confirms a contractual framework with variable worker hours. Despite the strong prevalence of contracts in Europe, however, the elasticity of labor supply is considerably smaller compared to the U.S. labor market.     

Contestability of the urban land market: an event study of Hong Kong land auctions

The traditional theory of urban land markets assumes perfect contestability—the absolute freedom of market entry—that compels developers to bid up the land rent to equal the economic profit from land use. This assumption, however, is empirically untested due to the difficulties in measuring the ex ante economic profit of land acquisition. We overcome these difficulties by applying the event-study methodology to Hong Kong government land auctions. When a developer acquires a site at a price below its fair market value, the rationality of the stock market entails a positive abnormal return on the developer’s stock. Our analysis shows evidence of positive expected abnormal returns, indicating an imperfectly contestable land market. We further show that the expected abnormal return increases with the site value and the government land disposal level but decreases with the property market liquidity.     

Managerial Delegation Contracts under Centralized Unionization

This paper studies how alternative managerial delegation contracts in a duopoly product market interact with wage decisions taken by a central (industry‐wide) union in the labor market. Interestingly, results prove to be more varied with respect to findings by the managerial delegation literature with exogenous production costs. Most notably, it is pointed out that, in equilibrium, both firm profitability and welfare outcomes can be superior under both sales delegation and relative profit delegation, depending on various factors such as the degree of product differentiation and the competition regime. Copyright © 2013 John Wiley & Sons, Ltd.     

Exercising Market Power in Proprietary Aftermarkets

Over 20 recent antitrust cases have turned on whether competition in complex durable-equipment markets prevents manufacturers from exercising market power over proprietary aftermarket products and services. We show that the price in the aftermarket will exceed marginal cost despite competition in the equipment market. Absent perfectly contingent long-term contracts, firms will balance the advantages of marginal-cost pricing to future generations of consumers against the payoff from monopoly pricing for current, locked-in equipment owners. The result holds for undifferentiated Bertrand competition, differentiated duopoly, and monopoly equipment markets. We also examine the effects of market growth and equipment durability.     

Exercising Market Power in Proprietary Aftermarkets

Over 20 recent antitrust cases have turned on whether competition in complex durable-equipment markets prevents manufacturers from exercising market power over proprietary aftermarket products and services. We show that the price in the aftermarket will exceed marginal cost despite competition in the equipment market. Absent perfectly contingent long-term contracts, firms will balance the advantages of marginal-cost pricing to future generations of consumers against the payoff from monopoly pricing for current, locked-in equipment owners. The result holds for undifferentiated Bertrand competition, differentiated duopoly, and monopoly equipment markets. We also examine the effects of market growth and equipment durability.     

Making water competition a reality

Following a decade since privatisation during which attempts at introducing competition for water services have been slow and somewhat ineffective, the government is now carrying out a review. Large-volume users have a thirst for water competition brought about by competition in other utilities. The economic regulator needs to allow a new contestable market for industrial water services to develop whilst major structural and legislative changes to facilitate competition are contemplated.     

Input Market Competition and the Make-or-Buy Decision

Recent theories of vertical integration based on incomplete contracts assume perfect competition on at least one side of the market. As a result, the make-or-buy choice has no redistributive effect and will reflect efficiency considerations only. This paper introduces imperfect competition into an otherwise standard model of a vertical relationship with noncontractable specific investments. We assume that there are a finite number of potential input suppliers with private information about their costs. We first show that a monopoly buyer of such inputs will often prefer to own the seller's assets even though it would be more efficient for the seller's assets not to be so owned. We then show that an increase in the number of potential partners on either side of the market reduces this inclination towards vertical integration. With perfect competition on either side of the market, the make-buy decision will reflect only efficiency considerations.     

Integration, agglomeration and welfare

This paper studies the social desirability of agglomeration, and the efficiency arguments for policy intervention in a simple, analytically tractable new economic geography model. The location pattern emerging as market equilibrium is ‘bubble-shaped’, i.e. it features dispersion both at high and low trade costs and stable equilibria with partial and full agglomeration for intermediate levels of trade costs. We show that the market equilibrium is characterized by over-agglomeration for high trade costs and under-agglomeration for low trade costs, and we work out analytically that a net pecuniary externality is the underlying cause of this market failure. One particularly noteworthy result is that the net pecuniary externality is positive at high levels of trade freeness. However, there is no market under-agglomeration unless this positive net pecuniary externality interacts with an additional congestion force originating in the (per se efficient) competitive housing market.     

Market reaction to large bank merger announcements in oligopolies

This paper evaluates the individual and rival stock price reactions to large bank merger announcements and subsequent regulatory rejection in an oligopoly. The results show that the announcements produce significant positive abnormal returns for the merger candidates. Regulatory obstacles and denial of the proposed mergers produce significant negative returns. Analysis of the rivals’ reactions doesn’t produce consistent significant results. This suggests that the market reactions for the merging banks results are driven by expected increases in efficiencies. The rivals’ reaction is explained by the fact that the market would remain contestable after the mergers since the offered products are homogeneous.(JEL G14, G34)