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.     

Bankruptcy, Takeovers, and Wage Contracts

Takeovers give raiders the opportunity of breaking implicit contracts inside the firm. If implicit contracts are adopted by workers and management to reach more efficient outcomes, then the possibility of takeovers may cause a welfare loss. We show that, under some conditions, this argument can go through even if the firm and the workers can write explicit and complete contracts. The crucial assumption is that the profitability of the firm is linked to its financial situation, in the sense that a firm which has a high probability of bankruptcy will face fewer opportunities than a financially solid firm. In this framework, the possibility of takeovers imposes constraints on the set of feasible employment contracts, leading to inefficient outcomes.     

Political contestability and public contract rigidity: An analysis of procurement contracts

Are public contracts less adaptable than private contracts? Using a comprehensive set of contracts for a standard product, we compare procurement contracts in which the procurer is either a public administration or a private corporation. We find that public‐to‐private contracts feature more rigidity clauses than private‐to‐private contracts and that the use of rigidity clauses in public contracts rises when political risks are more salient. We argue that a significant part of the increased rigidity of public contracts is a contractual adaptation to limit political hazards from political opponents and interested third parties.     

Relational retention

This paper uses a repeated-game model to study the retention of talented workers in the face of competition for talent. When the job benefits that workers value are non-contractible, retention cannot be achieved by a sequence of spot contracts, but must be based on self-enforcing long-term agreements, which we call relational retention contracts. Retention then is successful only if workers trust their employers' promises. We demonstrate that relational contracts are valuable even if there are no incentive problems inside firms and that firms with a relatively low valuation for talent may be able to retain talented workers.     

Motivate and select: Relational contracts with persistent types

We develop a model of relational contracts with moral hazard and asymmetric persistent information about an employee's type. We find that the form of the optimal contract depends on the job characteristics and the distribution of employees' talent. Bonus contracts are more likely to be adopted in complex jobs and when high talent is not too common or too rare. Firms with “normal” jobs are more likely to adopt termination contracts. In labor market equilibrium, different contracts may be adopted by ex ante identical firms. Hence, we offer an explanation for the coexistence of different employment systems within the same industry.     

Uniform and nonuniform staggering of wage contracts

This paper provides a model that can account for the almost uniform staggering of wage contracts in some countries as well as for the markedly nonuniform staggering in others. In the model, short and long contracts as well as long contracts concluded in different periods are strategic substitutes, which provide a powerful rationale for staggering. We show that for realistic parameter values, there is a continuum of possible equilibria with various degrees of staggering of long contracts. If the contracting cost is not too large, then the lowest possible degree of staggering decreases with the contracting cost and increases with monetary uncertainty.     

Vertical Foreclosure Using Exclusivity Clauses: Evidence from Shopping Malls

Exclusive contracts are one of the most controversial topics in the economic analysis of antitrust. Yet, very few empirical papers analyze the determinants and the consequences of exclusive contracts. In this paper, I study exclusive contracts between hamburger restaurants and Israeli shopping malls, in which mall owners commit to prohibiting additional hamburger restaurants from entering their malls. I investigate the determinants of these exclusive contracts and examine how such contracts affect the number of hamburger restaurants and their sales. I show that exclusive contracts are less likely to be adopted in larger malls, in malls that face more competition from other malls, and in malls that opened before 1993, when McDonald's and Burger King entered the Israeli market. I then use the mall's opening year—before or after 1993—as an instrumental variable to estimate a negative effect of exclusive contracts on the number of restaurants and on total mall hamburger sales. My findings are generally consistent with anti‐competitive vertical foreclosure models.     

Termination and Coordination in Partnerships

It is common practice for firms to pool their expertise by forming partnerships such as joint ventures and strategic alliances. A central organization problem in such partnerships is that managers may behave noncooperatively in order to advance the interests of their parent firms. We ask whether contracts can be designed so that managers will maximize total profits. We characterize first best contracts for a variety of environments and show that efficiency imposes some restrictions on the ownership shares. In addition, we evaluate the performance of two termination contracts that are widely used in practice: the shotgun rule and price competition. We find that although these contracts do not achieve full efficiency, they both perform well. We provide insight into when each rule is more efficient.     

Inflation forecast contracts

We introduce a new type of incentive contract for central bankers: inflation forecast contracts, which make central bankers׳ remunerations contingent on the precision of their inflation forecasts. We show that such contracts enable central bankers to influence inflation expectations more effectively, thus facilitating more successful stabilization of current inflation. Inflation forecast contracts improve the accuracy of inflation forecasts, but have adverse consequences for output. On balance, paying central bankers according to their forecasting performance improves welfare. Optimal inflation forecast contracts stipulate high rewards for accurate forecasts.     

Scale development and validation of Transaction Cost Economics typology for contracts: A systems thinking approach

A variety of contract typologies that exist in the literature are helpful in the exploration of different approaches in contractual relations, but only when measured with the right instruments. Although Transaction Cost Economics (TCE) has a distinct, high-level, and abstract typology for contracts, it still lacks a measurement scale. In this paper, a measurement scale for the TCE contract typology (classical, neo-classical, and relational contracts) was developed and validated, using systems thinking approach and experimental design to contribute to the empirical tests of TCE within the contracting realm. First, the antecedents of contract selection within the TCE literature were analyzed using the systemigram technique to visualize and parse out complex relationships that lead to contract selection. The analysis of the TCE Systemigram helped the development of the scale and revealed the need to revisit the risk neutrality assumption embedded in TCE. Second, a measurement scale for the TCE contract typology (classical, neo-classical, and relational contracts) was developed adhering to the original texts of seminal papers and reviews from the TCE literature. Third, the 14-item measurement scale was validated using a series of three vignette-based experimental studies.Key messageThis research explores the antecedents of the TCE contract typology and develops a measurement scale for essential characteristics of classical, neo-classical, and relational contracts, as defined in TCE, using systems thinking approach and a novel vignette-based experimental design.     

Revisiting the interplay between contractual and relational governance: A qualitative and meta-analytic investigation

Although extant literature has shown that formal contracts and relational governance play a key role in interorganizational relationships, the nature of their interplay still remains equivocal. To better understand the relationships between contractual and relational governance, we conducted a qualitative review and meta-analysis of the existing literature. Meta-analytic results from 33,051 interorganizational relationships across 149 empirical studies have indicated that contractual governance is positively related to both sides of relational governance—trust and relational norms. Our results have also indicated that contracts, trust, and relational norms jointly improve satisfaction and relationship performance and jointly reduce opportunism. These findings provide strong evidence for the complementarity arguments of the contractual–relational governance relationships and their joint impacts on performance. We also found that the mutual relationships between contractual and relational governance are moderated by the institutional environments, the interorganizational relationship type and length, and the construct measurement of contracts. Overall, this study provides new insights on when contractual and relational governance complement or substitute each other. We discuss the implications of our study for theory and practice and propose a research agenda for future research on governance in interorganizational relationships.     

Property Rights Protection of Biotechnology Innovations

Protection of intellectual property embedded in self-replicating biological innovations, such as genetically modified seed, presents two problems for the innovator: the need for copy protection of intellectual property and price competition between new seed and reproduced seed. We consider three regimes in two periods with asymmetric information: short-term contracts, biotechnological protection, and long-term contracts. We find that piracy imposes more intense competition for seed sales than does durability alone. Technology protection systems yield highest firm profit and long-term contracts outperform short-term contracts. Farmers prefer, in order, long-term, short-term, and biotechnical protection. Depending on monitoring cost, long-term contracts may be socially preferred to short-term contracts, with both preferred to biotechnical protection.     

Price discovery in the Indian gold futures market

This paper examines the price discovery process of the nascent gold futures contracts in the Multi Commodity Exchange of India (MCX) over the period 2003 to 2007. The study employs vector error correction models (VECMs) to show that futures prices of both standard and mini contracts lead spot price. We find that mini contracts contribute to over 30% of price discovery in gold futures trade even though they account for only 2% of trading value on the MCX. Our finding reveals that trades initiated in mini contracts are much more informative than what the size of their market share of volume suggests.     

考虑商品质量评价水平的退货和价格折扣契约复合供应链协调研究

商品质量因素越来越成为影响市场需求的一个重要因素。当考虑零售商的质量评价水平时,单一的契约(如退货契约或者折扣价格契约)无法使供应链系统达到协调,此时考虑两种或者两种以上契约的复合契约不失为一种可行的协调方法。文章基于退货和折扣价格复合契约通过建立具体的数学模型分析供应链系统的协调问题,得到了预期的协调效果,进而通过一个具体的算例更为详细直观地分析了复合契约的协调问题。     

设备维护外包服务商绩效评估的模糊综合评价方法

应用模糊综合评价方法于设备维护外包服务商绩效评估,指出外包服务商绩效评估应以外包合同为基准,并据此提出了二级度量指标体系,构建了基础指标关于评判等级的隶属函数,提出了基于模糊评价的绩效评价方法。最后通过一个算例,说明了该方法的应用。     

Vertical Integration and Exclusive Behavior of Insurers and Hospitals

We examine vertical integration and exclusive behavior in health care markets in which insurers and hospitals bilaterally bargain over contracts. We employ a bargaining model of two hospitals and two health insurers competing on premiums. We show that asymmetric equilibria exist in which one insurer contracts one hospital whereas the other insurer contracts both hospitals, even if all players are equally efficient in their production. Asymmetric equilibria arise if hospitals are sufficiently differentiated. In these cases, total industry profits increase and consumer welfare decreases in comparison to the case in which both insurers have contracts with both hospitals. Vertical integration makes these equilibria possible for a wider range of parameters.     

供应链契约研究综述

文章介绍了供应链契约的概念及分类,然后详细介绍了数量折扣契约、退货策略、数量柔性契约以及收入共享契约,最后指出供应链契约未来的研究方向。     

Public Contracts as Accountability Mechanisms: Assuring quality in public health care in England and Wales

Contracting in the public sector is designed to enhance the accountability of service providers to their funders. The idea is that quality is improved by the use of service specifications, monitoring of performance and imposition of contractual sanctions. Socio-legal and economic theories of contract indicate that it will be difficult to make and enforce contracts to achieve this. The results of a study of National Health Services contracting in England and Wales are reported. We conclude that contracts alone are not sufficient to improve accountability – collibration of various regulatory measures (including more hierarchical mechanisms such as performance targets) is required.     

Performance compensation contracts and CEOs’ incentive to shift risk to debtholders: An empirical analysis

The paper investigates the relationships among CEO incentive contracts, manager ownership, charter value, and bank risk taking. We analyze whether the presence and magnitude of incentive contracts induce CEOs of financially distressed firms and firms with high manager ownership to take unprofitable risks that shift wealth from debtholders to equity holders. Our sample focuses on banks that had both the incentive and opportunity to shift risks, and compares them with those that did not. We compare weak and strong banks in periods when the banks’ principal creditor, the FDIC, was a lenient and then a stringent monitor. The evidence is consistent with bonus compensation inducing CEOs of financially weak firms to shift risk to debtholders only if they do not have large insider ownership. The evidence is also consistent with these contracts rewarding CEOs for their effort to manage unforeseeable risk albeit not their ability. Low charter value banks with high managerial ownership took profitable risk during the lenient regulatory period.