A quota contract is known to be susceptible to the timing games by the agent. We show that this seemingly undesirable feature is what makes the use of quota contracts profitable for the principal who lacks contractual commitment power. A quota contract, by encouraging the agent's gaming activities, endogenously creates information asymmetry between the principal and the agent at the renegotiation stage, thereby curtailing the principal's temptation to renegotiate away any inefficient contractual punishment on the agent. Consequently, a properly designed quota contract enables the principal to save the overall agency cost by partially recovering the ability to implement dynamic incentives effectively.
{"title":"The Optimality of Quota Contracts","authors":"Pak Hung Au, Keiichi Kawai","doi":"10.2139/ssrn.3310652","DOIUrl":"https://doi.org/10.2139/ssrn.3310652","url":null,"abstract":"A quota contract is known to be susceptible to the timing games by the agent. We show that this seemingly undesirable feature is what makes the use of quota contracts profitable for the principal who lacks contractual commitment power. A quota contract, by encouraging the agent's gaming activities, endogenously creates information asymmetry between the principal and the agent at the renegotiation stage, thereby curtailing the principal's temptation to renegotiate away any inefficient contractual punishment on the agent. Consequently, a properly designed quota contract enables the principal to save the overall agency cost by partially recovering the ability to implement dynamic incentives effectively.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-01-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133318366","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}
Euclidian theories have it that there exist one or a small number of apex principles from which the entire fasciculus of rules of contract law can be logically deduced. Two arguments are marshalled against the Euclidian project. First, that it has been unsuccessfully attempted before – in the form of the nineteenth century contract law treatise which emulated the civil lawyer's rationalistic model, mos geometricus – cautioning us against setting much store by its present reincarnation. Second, that the common law's methodology makes it resistant to this form of theorising. Euclidian theory presupposes a picture of rules on which: a) cases involve an application of logically prior rules; b) rules are reliably identifiable by different actors in the legal system; and c) rules normatively range over an indefinite spectrum of future cases. It will be argued that the common law defies this picture of rules thus rendering Euclidian theory analytically impossible.
{"title":"Mos Geometricus and the Common Law Mind: Interrogating Contract Theory","authors":"S. Swaminathan","doi":"10.1111/1468-2230.12388","DOIUrl":"https://doi.org/10.1111/1468-2230.12388","url":null,"abstract":"Euclidian theories have it that there exist one or a small number of apex principles from which the entire fasciculus of rules of contract law can be logically deduced. Two arguments are marshalled against the Euclidian project. First, that it has been unsuccessfully attempted before – in the form of the nineteenth century contract law treatise which emulated the civil lawyer's rationalistic model, mos geometricus – cautioning us against setting much store by its present reincarnation. Second, that the common law's methodology makes it resistant to this form of theorising. Euclidian theory presupposes a picture of rules on which: a) cases involve an application of logically prior rules; b) rules are reliably identifiable by different actors in the legal system; and c) rules normatively range over an indefinite spectrum of future cases. It will be argued that the common law defies this picture of rules thus rendering Euclidian theory analytically impossible.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114072657","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}
This paper studies optimal contest design for competitive experimentation. The principal seeks contributions from multiple agents whose experimentation efforts are unobservable. To induce effort, the contest must provide agents with an information rent that increases in the duration of the contest. In the optimal contest, the principal limits the agents' rent by setting inefficiently tight deadlines. I show that the contest remains optimal when breakthroughs in experimentation are privately observed, and both the principal and the agents can disclose this information strategically. When hiring is costly, then a large contest is desirable only if the value of the innovation is sufficiently high, learning is not too fast, and there is sufficient variance in the prior probability of success.
{"title":"Innovation through Competitive Experimentation","authors":"Peter A. Wagner","doi":"10.2139/ssrn.3259637","DOIUrl":"https://doi.org/10.2139/ssrn.3259637","url":null,"abstract":"This paper studies optimal contest design for competitive experimentation. The principal seeks contributions from multiple agents whose experimentation efforts are unobservable. To induce effort, the contest must provide agents with an information rent that increases in the duration of the contest. In the optimal contest, the principal limits the agents' rent by setting inefficiently tight deadlines. I show that the contest remains optimal when breakthroughs in experimentation are privately observed, and both the principal and the agents can disclose this information strategically. When hiring is costly, then a large contest is desirable only if the value of the innovation is sufficiently high, learning is not too fast, and there is sufficient variance in the prior probability of success.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-12-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121863386","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}
This paper studies the optimal design of sales mechanisms when a buyer can quit the negotiation for an outside option at any time. The main results show that the profit-maximizing mechanism reduces price over time, and thus a set of buyer types delay purchasing the good. Moreover, to prevent the buyer from quitting the negotiation, the profit- maximizing mechanism also features an upfront payment, which is compensated later by an additional price discount. The seller can implement the profit-maximizing mechanism by offering a menu of European options.
{"title":"Optimal Sales Mechanism with Outside Options","authors":"Dongkyu Chang","doi":"10.2139/ssrn.3407803","DOIUrl":"https://doi.org/10.2139/ssrn.3407803","url":null,"abstract":"This paper studies the optimal design of sales mechanisms when a buyer can quit the negotiation for an outside option at any time. The main results show that the profit-maximizing mechanism reduces price over time, and thus a set of buyer types delay purchasing the good. Moreover, to prevent the buyer from quitting the negotiation, the profit- maximizing mechanism also features an upfront payment, which is compensated later by an additional price discount. The seller can implement the profit-maximizing mechanism by offering a menu of European options.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-12-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123792368","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}
This paper revisits the opportunism problem faced by an upstream monopolist contracting with several retailers over secret agreements, when contracts are linear. We characterize the equilibrium under secret contracts and compare it to that under public ones in a setting which allows for general forms of demand and retail competition. We find that market distortions are more severe under secret contracts than public ones if and only if retailers' actions are strategic complements. We also investigate the effect of opportunism on firms' profits. Our main results remain robust whether retailers hold passive or wary beliefs. Finally, we discuss the implications of our results for the antitrust analysis of information exchange between competing retailers, and for the empirical analysis of 'Nash-in-Nash' models.
{"title":"Vertical Relations, Opportunism, and Welfare","authors":"Germain Gaudin","doi":"10.2139/ssrn.2819489","DOIUrl":"https://doi.org/10.2139/ssrn.2819489","url":null,"abstract":"This paper revisits the opportunism problem faced by an upstream monopolist contracting with several retailers over secret agreements, when contracts are linear. We characterize the equilibrium under secret contracts and compare it to that under public ones in a setting which allows for general forms of demand and retail competition. We find that market distortions are more severe under secret contracts than public ones if and only if retailers' actions are strategic complements. We also investigate the effect of opportunism on firms' profits. Our main results remain robust whether retailers hold passive or wary beliefs. Finally, we discuss the implications of our results for the antitrust analysis of information exchange between competing retailers, and for the empirical analysis of 'Nash-in-Nash' models.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"114 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-08-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114668129","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}
We study a novel database of intellectual property (IP) licensing agreements sourced from filings made by publicly-listed corporations, a large fraction of which firms (initially) disclose with redacted terms. In contrast to the benchmark that IP quality alone determines the pricing of IP, we argue that bargaining power plays a critical role and explains several patterns in observed royalty rates. Licensors with differentiated technology and high market power charge higher royalty rates, while larger-than-rival licensees pay lower royalty rates. Licensors command premium royalty rates for contractual features such as exclusivity. Finally, we employ this framework and setting to understand pricing implications of non-disclosure: licensors redact when they transact at lower royalty rates, consistent with preserving bargaining power for future negotiations. Our findings offer a new explanation for innovator secrecy and have several practical takeaways for transfer pricing and patent litigation.
{"title":"Bargaining Power in the Market for Intellectual Property: Evidence from Licensing Contract Terms","authors":"Gaurav Kankanhalli, Alan P. Kwan","doi":"10.2139/ssrn.3171920","DOIUrl":"https://doi.org/10.2139/ssrn.3171920","url":null,"abstract":"We study a novel database of intellectual property (IP) licensing agreements sourced from filings made by publicly-listed corporations, a large fraction of which firms (initially) disclose with redacted terms. In contrast to the benchmark that IP quality alone determines the pricing of IP, we argue that bargaining power plays a critical role and explains several patterns in observed royalty rates. Licensors with differentiated technology and high market power charge higher royalty rates, while larger-than-rival licensees pay lower royalty rates. Licensors command premium royalty rates for contractual features such as exclusivity. Finally, we employ this framework and setting to understand pricing implications of non-disclosure: licensors redact when they transact at lower royalty rates, consistent with preserving bargaining power for future negotiations. Our findings offer a new explanation for innovator secrecy and have several practical takeaways for transfer pricing and patent litigation.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129624075","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}
Russian Abstract: В работе продемонстрированы механизмы воздействия слаборациональных предпочтений доминирующих собственников на проектирование организационной структуры промышленных корпораций холдингового типа и на состав ее производственных активов. На этой основе сформированы рекомендации по совершенствованию организационной структуры отечественных корпораций холдингового типа. В завершение рассмотрены контрактные отношения в современных отечественных компаниях, их влияние на построение компаний. English Abstract: The paper shows the mechanisms of the influence of the weak-rational preferences of the dominant owners on the design of the organizational structure of industrial holding corporations and on the composition of its production assets. On this basis, recommendations have been made to improve the organizational structure of domestic holding corporations. In conclusion, the contractual relations in modern domestic companies, their influence on the construction of companies are examined.
{"title":"Институциональные Факторы Совершенствования Организационной Структуры Российских Корпораций Холдингового Типа (Institutional Factors of Improving the Organizational Structure of Russian Holding Corporations)","authors":"D. Zdanov, Olga Gumilevskaya, Galina Pakhomova","doi":"10.2139/ssrn.3178655","DOIUrl":"https://doi.org/10.2139/ssrn.3178655","url":null,"abstract":"<b>Russian Abstract:</b> В работе продемонстрированы механизмы воздействия слаборациональных предпочтений доминирующих собственников на проектирование организационной структуры промышленных корпораций холдингового типа и на состав ее производственных активов. На этой основе сформированы рекомендации по совершенствованию организационной структуры отечественных корпораций холдингового типа. В завершение рассмотрены контрактные отношения в современных отечественных компаниях, их влияние на построение компаний. <b>English Abstract:</b> The paper shows the mechanisms of the influence of the weak-rational preferences of the dominant owners on the design of the organizational structure of industrial holding corporations and on the composition of its production assets. On this basis, recommendations have been made to improve the organizational structure of domestic holding corporations. In conclusion, the contractual relations in modern domestic companies, their influence on the construction of companies are examined.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-05-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132258834","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}
Firms often offer contracts that vary by fee structures, hoping to differentiate among types of consumers. Such contracts require that consumers make estimates of their own future behavior to choose among service contracts whose prices condition on usage. We study the contract choices and service usage of credit card consumers with a choice between two possible fee structures: a card with an upfront lump-sum fee without spending requirement, and a card with an annual fee which can be waived each year if a minimum amount is charged to the card. Using panel data of over 16,000 credit card accounts, including contract choice and subsequent monthly account usage, we examine the extent to which consumers accurately predict their own credit card usage in their contract choice, and whether and how they learn from their experiences with ex-post ‘mistakes’. Compared the prior literature on fixed fee versus use-based fee contract selection, we find consumer reliance on forward-looking incentives rather than an intrinsic appeal of payment schemes with single upfront payments. Following errors made in the first year of membership, consumers showed evidence of learning according to their future monetary incentives. However, card attrition rather than spending adjustment, was the preferred margin for adjustment in the aggregate, showing an overall unwillingness of consumers to change their product usage on the intrinsic margin in response to financial penalties. We also examine the relationship between contract choice, education and financial health indicators. Consumers with lower education levels had a greater tendency towards contract selection errors, while there is a positive relationship between contract errors and negative indicators of financial health such as months of rolling debt, installment plan participation, and cash advance withdrawals. This suggests that even while the stakes are only small to moderate, contract choice errors are more generally indicative of consumers’ financial planning difficulties.
{"title":"Prediction and Learning About Credit Card Spending","authors":"Liyin Jin, J. Lien, Junji Xiao","doi":"10.2139/ssrn.3172869","DOIUrl":"https://doi.org/10.2139/ssrn.3172869","url":null,"abstract":"Firms often offer contracts that vary by fee structures, hoping to differentiate among types of consumers. Such contracts require that consumers make estimates of their own future behavior to choose among service contracts whose prices condition on usage. We study the contract choices and service usage of credit card consumers with a choice between two possible fee structures: a card with an upfront lump-sum fee without spending requirement, and a card with an annual fee which can be waived each year if a minimum amount is charged to the card. Using panel data of over 16,000 credit card accounts, including contract choice and subsequent monthly account usage, we examine the extent to which consumers accurately predict their own credit card usage in their contract choice, and whether and how they learn from their experiences with ex-post ‘mistakes’. Compared the prior literature on fixed fee versus use-based fee contract selection, we find consumer reliance on forward-looking incentives rather than an intrinsic appeal of payment schemes with single upfront payments. Following errors made in the first year of membership, consumers showed evidence of learning according to their future monetary incentives. However, card attrition rather than spending adjustment, was the preferred margin for adjustment in the aggregate, showing an overall unwillingness of consumers to change their product usage on the intrinsic margin in response to financial penalties. We also examine the relationship between contract choice, education and financial health indicators. Consumers with lower education levels had a greater tendency towards contract selection errors, while there is a positive relationship between contract errors and negative indicators of financial health such as months of rolling debt, installment plan participation, and cash advance withdrawals. This suggests that even while the stakes are only small to moderate, contract choice errors are more generally indicative of consumers’ financial planning difficulties.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-05-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122477559","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}
This paper analyzes relational contracts under moral hazard. We first show that if the available information (signal) about effort satisfies a generalized monotone likelihood ratio property, then irrespective of whether the first-order approach (FOA) is valid or not, the optimal bonus scheme takes a simple form. The scheme rewards the agent a fixed bonus if his performance index exceeds a threshold, like the FOA contract of Levin (2003), but the threshold can be set differently. We next derive a sufficient and necessary condition for non-verifiable information to improve a relational contract. Our new informativeness criterion sheds light on the nature of an ideal performance measure in relational contracting.
{"title":"Relational Incentive Contracts and Performance Measurement","authors":"C. Chi, Trond E. Olsen","doi":"10.2139/ssrn.3167697","DOIUrl":"https://doi.org/10.2139/ssrn.3167697","url":null,"abstract":"This paper analyzes relational contracts under moral hazard. We first show that if the available information (signal) about effort satisfies a generalized monotone likelihood ratio property, then irrespective of whether the first-order approach (FOA) is valid or not, the optimal bonus scheme takes a simple form. The scheme rewards the agent a fixed bonus if his performance index exceeds a threshold, like the FOA contract of Levin (2003), but the threshold can be set differently. We next derive a sufficient and necessary condition for non-verifiable information to improve a relational contract. Our new informativeness criterion sheds light on the nature of an ideal performance measure in relational contracting.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-04-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121062101","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}
This paper provides novel evidence that stronger contract enforcement mitigates hold up in business investment decisions using stark, externally imposed variation in contract enforcement across Native American reservations. My tests focus on the golf course industry, which involves a high degree of sunk costs and long investment horizons, and is thus, naturally subject to the classical hold up problem. I find that state courts, which provide stronger contract enforcement than tribal courts, lead to at least 27% more golf courses, with greater effects in areas with greater natural amenities. These findings suggest that courts play an important role in facilitating the oft-discussed contractual solutions to the hold up problem.
{"title":"Does Contract Enforcement Mitigate Hold Up?","authors":"J. Cookson","doi":"10.2139/ssrn.3152459","DOIUrl":"https://doi.org/10.2139/ssrn.3152459","url":null,"abstract":"This paper provides novel evidence that stronger contract enforcement mitigates hold up in business investment decisions using stark, externally imposed variation in contract enforcement across Native American reservations. My tests focus on the golf course industry, which involves a high degree of sunk costs and long investment horizons, and is thus, naturally subject to the classical hold up problem. I find that state courts, which provide stronger contract enforcement than tribal courts, lead to at least 27% more golf courses, with greater effects in areas with greater natural amenities. These findings suggest that courts play an important role in facilitating the oft-discussed contractual solutions to the hold up problem.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-03-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126665994","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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