We propose a theory of security design in financing entrepreneurial production, positing that the investor can acquire costly information on the entrepreneur’s project before making the financing decision. When the entrepreneur has enough bargaining power in security design, the optimal security helps incentivize both efficient information acquisition and efficient financing. Debt is optimal when information is not very valuable for production, whereas the combination of debt and equity is optimal when information is valuable. If, instead, the investor has sufficiently strong bargaining power in security design or can acquire information only after financing, equity is optimal.Received October 12, 2015; editorial decision February 10, 2018 by Editor Itay Goldstein.
{"title":"Financing Entrepreneurial Production: Security Design with Flexible Information Acquisition","authors":"Ming-yu Yang, Yao Zeng","doi":"10.2139/ssrn.2194194","DOIUrl":"https://doi.org/10.2139/ssrn.2194194","url":null,"abstract":"We propose a theory of security design in financing entrepreneurial production, positing that the investor can acquire costly information on the entrepreneur’s project before making the financing decision. When the entrepreneur has enough bargaining power in security design, the optimal security helps incentivize both efficient information acquisition and efficient financing. Debt is optimal when information is not very valuable for production, whereas the combination of debt and equity is optimal when information is valuable. If, instead, the investor has sufficiently strong bargaining power in security design or can acquire information only after financing, equity is optimal.Received October 12, 2015; editorial decision February 10, 2018 by Editor Itay Goldstein.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"51 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-12-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131624557","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}
Purpose – Whilst e-procurement has significant potential to reduce the purchasing costs of an organization, the realization of these savings requires user compliance. The purpose of this paper is to examine the extent to which user-perceived e-procurement quality (EPQ) (operationalized through the dimensions of professionalism, processing, training and specification) influences contract compliance. Design/methodology/approach – Data were collected through a survey questionnaire responded by 100 senior executive in the industry in Malaysia. The relationships proposed in the developed theoretical framework were represented through three hypothesis: H1- there is a significant relationship between professionalism and contract compliance. H2- There is a significant relationship between processing and contract compliance. H3- there is a significant relationship between specification and contract compliance. Linear regression, ANOVA and Pearson correlation were used to test the hypotheses. Findings – Strong evidence was found of a positive relationship between user-perceived EPQ and both system and contract compliance. System compliance was most strongly influenced by professionalism and content dimensions, whilst contract compliance was most strongly influenced by processing, specification, and content dimensions. Research limitations/implications – Data were collected from e-procurement users in four organizations, which may limit the extent to which findings can be generalized. Practical implications – User-perceptions of e-procurement provision significantly influence system and contract adoption. Practitioners should pay attention to management of different dimensions of perceived quality as they may have different effects on both contract and system compliance. Originality/value – This paper is the first to empirically assess the relationship between user-perceived EPQ and compliance. Its findings challenge the assumption that the monopolistic dynamics common within internal services, such as e-procurement provision, are sufficient to ensure compliance. Dissatisfied individuals invariably find ways to circumvent mandatory systems and contracts.
{"title":"The Determinants of Contract Compliance in E- Procurement and Distribution Industry in Malaysia","authors":"Jessy Jarau","doi":"10.2139/ssrn.3090130","DOIUrl":"https://doi.org/10.2139/ssrn.3090130","url":null,"abstract":"Purpose – Whilst e-procurement has significant potential to reduce the purchasing costs of an organization, the realization of these savings requires user compliance. The purpose of this paper is to examine the extent to which user-perceived e-procurement quality (EPQ) (operationalized through the dimensions of professionalism, processing, training and specification) influences contract compliance. Design/methodology/approach – Data were collected through a survey questionnaire responded by 100 senior executive in the industry in Malaysia. The relationships proposed in the developed theoretical framework were represented through three hypothesis: H1- there is a significant relationship between professionalism and contract compliance. H2- There is a significant relationship between processing and contract compliance. H3- there is a significant relationship between specification and contract compliance. Linear regression, ANOVA and Pearson correlation were used to test the hypotheses. Findings – Strong evidence was found of a positive relationship between user-perceived EPQ and both system and contract compliance. System compliance was most strongly influenced by professionalism and content dimensions, whilst contract compliance was most strongly influenced by processing, specification, and content dimensions. Research limitations/implications – Data were collected from e-procurement users in four organizations, which may limit the extent to which findings can be generalized. Practical implications – User-perceptions of e-procurement provision significantly influence system and contract adoption. Practitioners should pay attention to management of different dimensions of perceived quality as they may have different effects on both contract and system compliance. Originality/value – This paper is the first to empirically assess the relationship between user-perceived EPQ and compliance. Its findings challenge the assumption that the monopolistic dynamics common within internal services, such as e-procurement provision, are sufficient to ensure compliance. Dissatisfied individuals invariably find ways to circumvent mandatory systems and contracts.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"19 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-12-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117028189","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}
The increasing divorce rate has become a major social concern for policy makers in the Islamic government of Iran. The price of gold coin is an important factor in cost-benefit analysis for individuals in their marriage and divorce decisions in Iran. Dowries (Mehrieh) are usually in the form of gold coin and a wife has a legal right to them upon both parties signing the marriage contract. Increasing the price of gold coin may intensify the internal stress and struggles within families, leading to a higher probability of divorce. We investigate the long-run relationship between real price of gold coin and divorce rate for the case of Iran over the period 1980-2014. Controlling for other factors, our regression results show that there is a positive and significant long-run relationship between real price of gold coin (as well as unanticipated changes in real price of gold coin) and marital instability.
{"title":"Divorce and Gold Coins: A Case Study of Iran","authors":"M. Farzanegan, Hassan Gholipour Fereidouni","doi":"10.2139/ssrn.3144304","DOIUrl":"https://doi.org/10.2139/ssrn.3144304","url":null,"abstract":"The increasing divorce rate has become a major social concern for policy makers in the Islamic government of Iran. The price of gold coin is an important factor in cost-benefit analysis for individuals in their marriage and divorce decisions in Iran. Dowries (Mehrieh) are usually in the form of gold coin and a wife has a legal right to them upon both parties signing the marriage contract. Increasing the price of gold coin may intensify the internal stress and struggles within families, leading to a higher probability of divorce. We investigate the long-run relationship between real price of gold coin and divorce rate for the case of Iran over the period 1980-2014. Controlling for other factors, our regression results show that there is a positive and significant long-run relationship between real price of gold coin (as well as unanticipated changes in real price of gold coin) and marital instability.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130326878","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}
I examine optimal managerial compensation and turnover policy in a principal-agent model in which the firm output is serially correlated over time. The model captures a learning-by-doing feature: higher effort by the manager increases the quality of the match between the firm and the manager in the future. The optimal incentive scheme entails an inefficiently high turnover rate in the early stages of the employment relationship. The optimal turnover probability depends on the past performance and the likelihood of turnover decreases gradually with superior performance. Following weak performance, the contract implements a permanently inefficient turnover rate. With correlated outcome, a permanent inefficiency is needed to save on information rents to the agent, even when the agent does not have persistent private information.
{"title":"Contracting with Long-Term Consequences","authors":"Suvi Vasama","doi":"10.2139/ssrn.3013566","DOIUrl":"https://doi.org/10.2139/ssrn.3013566","url":null,"abstract":"I examine optimal managerial compensation and turnover policy in a principal-agent model in which the firm output is serially correlated over time. The model captures a learning-by-doing feature: higher effort by the manager increases the quality of the match between the firm and the manager in the future. The optimal incentive scheme entails an inefficiently high turnover rate in the early stages of the employment relationship. The optimal turnover probability depends on the past performance and the likelihood of turnover decreases gradually with superior performance. Following weak performance, the contract implements a permanently inefficient turnover rate. With correlated outcome, a permanent inefficiency is needed to save on information rents to the agent, even when the agent does not have persistent private information.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-08-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115831969","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 two types of vertical contracts that reference rivals: the “vertical price constraint” (VPC) requires retail prices for a manufacturer’s product to be no higher than for its competitors’ products. The “vertical margin constraint” (VMC) requires retail margins for a manufacturer’s product to be no higher than for its competitors’ products. These agreements are found in the soft drink and cigarette industries, and in travel platforms. With two asymmetric manufacturers, we find that only the larger adopts a VPC in a subgame perfect equilibrium. We also analyze incentive compatibility issues with optional VPC agreements. Apart from leading to increased prices, the VPC leads to lower profits for the smaller manufacturer. In contrast, the VMC leads to lower prices. Under certain conditions, by adopting the VMC, a larger manufacturer will gain enough to compensate the retailer and still be better off, while making its competitor worse off. These two vertical contracts work because they alter the price elasticities of demand that face upstream manufacturers.
{"title":"Vertical Contract That Reference Rivals","authors":"Fan Liu, D. Sibley, Wei Zhao","doi":"10.2139/ssrn.2866029","DOIUrl":"https://doi.org/10.2139/ssrn.2866029","url":null,"abstract":"We study two types of vertical contracts that reference rivals: the “vertical price constraint” (VPC) requires retail prices for a manufacturer’s product to be no higher than for its competitors’ products. The “vertical margin constraint” (VMC) requires retail margins for a manufacturer’s product to be no higher than for its competitors’ products. These agreements are found in the soft drink and cigarette industries, and in travel platforms. With two asymmetric manufacturers, we find that only the larger adopts a VPC in a subgame perfect equilibrium. We also analyze incentive compatibility issues with optional VPC agreements. Apart from leading to increased prices, the VPC leads to lower profits for the smaller manufacturer. In contrast, the VMC leads to lower prices. Under certain conditions, by adopting the VMC, a larger manufacturer will gain enough to compensate the retailer and still be better off, while making its competitor worse off. These two vertical contracts work because they alter the price elasticities of demand that face upstream manufacturers.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"757 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-07-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116118628","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}
Abstract Principals seek to enter into a productive relationship with agents by posting mechanisms in a market with competitive search. A mechanism includes an incentive contract if the meeting is bilateral, and an ex post bidding process, in which agents make contract offers, if several agents meet the same principal. In equilibrium, the bidding process induces a lottery over two contracts. The main result is that the equilibrium allocation is not constrained welfare optimal, precisely because of this contracting risk. This stands in contrast to known results. Hence the optimality of such ex post bidding mechanism is sensitive to the extensive form, as well as to risk aversion. Correcting the allocation is possible, but may be heavy-handed.
{"title":"Bidding for Incentive Contracts","authors":"B. Julien, G. Roger","doi":"10.2139/ssrn.3008405","DOIUrl":"https://doi.org/10.2139/ssrn.3008405","url":null,"abstract":"Abstract Principals seek to enter into a productive relationship with agents by posting mechanisms in a market with competitive search. A mechanism includes an incentive contract if the meeting is bilateral, and an ex post bidding process, in which agents make contract offers, if several agents meet the same principal. In equilibrium, the bidding process induces a lottery over two contracts. The main result is that the equilibrium allocation is not constrained welfare optimal, precisely because of this contracting risk. This stands in contrast to known results. Hence the optimality of such ex post bidding mechanism is sensitive to the extensive form, as well as to risk aversion. Correcting the allocation is possible, but may be heavy-handed.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130646361","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}
If the buyer breaches a sales contract, and if the seller can be characterized as a lost volume seller, courts and commentators have argued that the seller should be made whole by compensation for its lost profits. This paper argues that framing the problem in this way leads to an absurd result. The buyer has a termination option and the remedy should be the implicit option price. The lost profit remedy sets a price on that option, a price that bears no relation to reality. Examination of the case law suggests three conclusions: (a) the remedy often sets an excessive implicit option price; (b) courts sometimes give inadequate weight to the explicit option price; and (c) courts will sometimes leap to the lost profit remedy when an adequate remedy already exists.
{"title":"The Lost Volume Seller, R.I.P.","authors":"Victor P. Goldberg","doi":"10.2139/SSRN.2943036","DOIUrl":"https://doi.org/10.2139/SSRN.2943036","url":null,"abstract":"If the buyer breaches a sales contract, and if the seller can be characterized as a lost volume seller, courts and commentators have argued that the seller should be made whole by compensation for its lost profits. This paper argues that framing the problem in this way leads to an absurd result. The buyer has a termination option and the remedy should be the implicit option price. The lost profit remedy sets a price on that option, a price that bears no relation to reality. Examination of the case law suggests three conclusions: (a) the remedy often sets an excessive implicit option price; (b) courts sometimes give inadequate weight to the explicit option price; and (c) courts will sometimes leap to the lost profit remedy when an adequate remedy already exists.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"19 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-06-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134287923","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}
Trust drafting practices have changed dramatically in recent decades. A range of considerations has led to an increase in the dispositive discretions held by trustees. In some cases, the trustees’ dispositive discretions effectively govern the whole trust structure, leading to what the author calls a ‘massively discretionary trust’. These trusts create a series of legal risks. These include the possibility that the trust property is held on resulting trust from the moment of the trust’s constitution and the possibility that the beneficiaries can collapse the trust and take the trust property. Some drafting techniques may be based on a misunderstanding of the law; some may invite litigation; and the governing legal principles, as understood by some drafters, may be subject to revision and refinement by the courts. This paper will examine some of these possibilities using concrete examples.
{"title":"Massively Discretionary Trusts","authors":"Lionel R. Smith","doi":"10.1093/clp/cuw014","DOIUrl":"https://doi.org/10.1093/clp/cuw014","url":null,"abstract":"Trust drafting practices have changed dramatically in recent decades. A range of considerations has led to an increase in the dispositive discretions held by trustees. In some cases, the trustees’ dispositive discretions effectively govern the whole trust structure, leading to what the author calls a ‘massively discretionary trust’. These trusts create a series of legal risks. These include the possibility that the trust property is held on resulting trust from the moment of the trust’s constitution and the possibility that the beneficiaries can collapse the trust and take the trust property. Some drafting techniques may be based on a misunderstanding of the law; some may invite litigation; and the governing legal principles, as understood by some drafters, may be subject to revision and refinement by the courts. This paper will examine some of these possibilities using concrete examples.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-03-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133569166","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 article characterizes optimal compensation contracts in principal-agent settings in which the consequences of the agent’s action are only observed over time. The optimal timing of pay trades off the costs of deferred compensation arising from the agent’s relative impatience and potential consumption smoothing needs against the benefit of exploiting additional informative signals. By capturing this information benefit of deferral in terms of the likelihood ratio dynamics, our characterization covers general signal processes in a unified setting. With bilateral risk neutrality and agent limited liability, optimal contracts are high-powered and stipulate at most two payout dates. If the agent is additionally risk-averse, payouts are contingent on performance exceeding a hurdle that is increasing over time. We obtain clear-cut predictions on how the duration of optimal compensation depends on the nature of information arrival as well as agent characteristics and derive implications for the maturity structure of securities in financial contracting settings.
{"title":"Only Time Will Tell: A Theory of Deferred Compensation","authors":"R. Inderst, Marcus M. Opp","doi":"10.2139/ssrn.2894496","DOIUrl":"https://doi.org/10.2139/ssrn.2894496","url":null,"abstract":"\u0000 This article characterizes optimal compensation contracts in principal-agent settings in which the consequences of the agent’s action are only observed over time. The optimal timing of pay trades off the costs of deferred compensation arising from the agent’s relative impatience and potential consumption smoothing needs against the benefit of exploiting additional informative signals. By capturing this information benefit of deferral in terms of the likelihood ratio dynamics, our characterization covers general signal processes in a unified setting. With bilateral risk neutrality and agent limited liability, optimal contracts are high-powered and stipulate at most two payout dates. If the agent is additionally risk-averse, payouts are contingent on performance exceeding a hurdle that is increasing over time. We obtain clear-cut predictions on how the duration of optimal compensation depends on the nature of information arrival as well as agent characteristics and derive implications for the maturity structure of securities in financial contracting settings.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114574861","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}
The bargain theory of exchange, which led to regulations of transactions before the existence of contract law, suffered from several limitations and inefficiency. The unenforceability of promises without consideration and enforceability of unfair bargains were major limitations of the bargain principle. The transaction cost involved in negotiations increased due to absence of regulatory mechanism. The solution to the problem is derived from the coase’s theorem of social cost, which paved way for the contract law. The contract law by enforcing unenforceable promises and protecting parties from going into loss led to economic efficiency in transactions.
{"title":"Economic Efficiency of Contract Law","authors":"Mariya Mustafa Daginawala","doi":"10.2139/ssrn.2915804","DOIUrl":"https://doi.org/10.2139/ssrn.2915804","url":null,"abstract":"The bargain theory of exchange, which led to regulations of transactions before the existence of contract law, suffered from several limitations and inefficiency. The unenforceability of promises without consideration and enforceability of unfair bargains were major limitations of the bargain principle. The transaction cost involved in negotiations increased due to absence of regulatory mechanism. The solution to the problem is derived from the coase’s theorem of social cost, which paved way for the contract law. The contract law by enforcing unenforceable promises and protecting parties from going into loss led to economic efficiency in transactions.","PeriodicalId":285784,"journal":{"name":"ERN: Economics of Contract: Theory (Topic)","volume":"73 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-10-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115711695","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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