Essays in Dynamic Contract Theory PDF Download

Author: Sebastian Köhne
Publisher:
ISBN:
Category :
Languages : en
Pages : 96

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Author: Rui Zhao
Publisher:
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Category :
Languages : en
Pages : 224

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Author: Ilia Krasikov
Publisher:
ISBN:
Category :
Languages : en
Pages :

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The thesis focuses on understanding the dynamic nature of contracts used in various economic context, specifically financial economics and industrial organization. The first chapter "A Theory of Dynamic Contracting with Financial Constraints'' draws on a large empirical literature documenting that small businesses are financially constrained, and operate at an inefficient level. In the paper, we build a theoretical model where financial constraints arise endogenously as a product of interaction between persistent agency frictions and agent's inability to raise external capital.The paper makes two general points. First, efficiency is a certainty in the long run, and it is achieved through monotone slacking of financial constraints. Second, persistence makes the path towards efficiency much more constrained in comparison to the model with the iid technology. In particular, we show that dynamic agency models with persistence predict a larger cross section of firms in the economy to be financially constrained.At a technical level, we invoke the recursive approach of \citet{aps}, using a two-dimensional vector of promised utilities as a state variable. We show that the optimal contract always stays in a strict subset of the recursive domain termed the shell, and the optimal contract is monotone within this set. We also verify that the results continue to hold in continuous time.The second chapter "Dynamic Contracts with Unequal Discounting'' looks at dynamic screening with soft financial constraints. In contrast to the first paper, the agent can raise money but at a different rate than the principal.We solve for the optimal contract and show that efficiency is not attainable with soft financial constraints. Therefore, the predictions of dynamic models of mechanism design are not robust to the assumption of equal discounting. For the large set of parameters, the optimal contract has the restart property- dynamic distortions are a function of the number of consecutive bad shocks, and once the good shock arrives the process repeats again. We also show that restricting attention to contracts which have the restart property is in general approximately optimal. The endogenous resetting aspect of restart contracts shares features of various contracts used in practice.In the third chapter "On Dynamic Pricing'', we explore dynamic price discrimination, extending a canonical model of monopolistic screening to repeated sales, where a seller uses timing of purchases as a screening instrument. The importance of time as an instrument for price discrimination has been understood since Varian [1989].In the paper, we are aiming to provide a formal analysis of pricing strategies to discriminate amongst consumers based on the timing of information arrival and/or the timing of purchase.A seller repeatedly trades with a buyer. Buyer's valuations for the trade follow a renewal process; that is, they change infrequently at random dates. For the model with two periods, We show that selling the first period good for a spot price and selling the second period good by optioning a sequence of forwards is the optimal pricing strategy. Specifically, at the outset, the seller offers an American option which can be exercised in each of the two periods. Exercising the option grants the buyer with a forward- an obligation to purchase the second period good for a specific price, and a strike price- a right to buy (or not) the good in the second period after learning his value. The buyer with a high valuation exercises the option in the first period, whereas one with a low valuation waits until the second period and then takes a call.We extend the analysis to the general continuous time renewal processes and assess the performance of price discrimination based on American options on forwards:i.optioning forwards is shown to be the deterministic optimum for the sequential screening problem- when the seller makes a sale in a single fixed period;ii.optioning forwards is shown to be the exact optimum for the repeated sales problem in the restricted class of strongly monotone contracts- when allocative distortions are monotone in a whole vector of buyer's valuations;iii.the optimum for the repeated sales problem in the unrestricted class of contracts is shown to be backloaded and a theoretical bound is provided for the fraction of optimal revenue that can be extracted by optioning forwards.Finally, the construction of dynamic pricing mechanism and bounds is ported to study repeated auctions.

Author: Peter Benson
Publisher: Cambridge University Press
ISBN: 0521640385
Category : Law
Languages : en
Pages : 365

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Essays addressing a variety of issues in the theory and practice of contract law.

Author: Zenan Wu
Publisher:
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Category :
Languages : en
Pages : 252

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This dissertation consists of two essays on contract theory. I investigate contracts under different economics contexts. In the first chapter, I consider a two-period model in which the success of the firm depends on the effort of a first-period manager (the incumbent) and the ability of a second-period manager. At the end of the first period, the board receives a noisy signal of the incumbent manager's ability and decides whether to retain or replace the incumbent manager. I show that the information technology the board has to assess the incumbent manager's ability is an important determinant of the optimal contract and replacement policy. The contract must balance providing incentives for the incumbent manager to exert effort and ensuring that the second-period manager is of high ability. I show that severance pay in the contract serves as a costly commitment device to induce effort. Unlike existing models, I identify conditions on the information structure under which both entrenchment and anti-entrenchment emerge in the optimal contract. In the second chapter, I use a dynamic model of life insurance with one-sided commitment and bequest-driven lapsation, as in Daily, Hendel and Lizzeri (2008) and Fang and Kung (2010), but with policyholders who may underestimate the probability of losing their bequest motive, to analyze how the life settlement market--the secondary market for life insurance--may affect consumer welfare in equilibrium. I show that life settlement may increase consumer welfare in equilibrium when (i) policyholders are sufficiently overconfident; and (ii) the intertemporal elasticity of substitution of consumption (IES) of policyholders is greater than one.

Author: Alessandro Citanna
Publisher: Springer Science & Business Media
ISBN: 3540271929
Category : Business & Economics
Languages : en
Pages : 278

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In the area of dynamic economics, David Cass’s work has spawned a number of important lines of research, including the study of dynamic general equilibrium theory, the concept of sunspot equilibria, and general equilibrium theory when markets are incomplete. Based on these contributions, this volume contains new developments in the field, written by Cass's students and co-authors.

Author: Suehyun Kwon
Publisher:
ISBN:
Category :
Languages : en
Pages : 142

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This thesis examines three models of dynamic contracting. The first model is a model of dynamic moral hazard with partially persistent states, and the second model considers relational contracts when the states are partially persistent. The last model studies preference for delegation with learning. In the first chapter, the costly unobservable action of the agent produces a good outcome with some probability, and the probability of the good outcome corresponds to the state. The states are unobservable and follow an irreducible Markov chain with positive persistence. The chapter finds that an informational rent arises in this environment. The second best contract resembles a tenure system: the agent is paid nothing during the probationary period, and once he is paid, the principal never takes his outside option again. The second best contract becomes stationary after the agent is tenured. For discount factors close to one, the principal can approximate his first best payoff with review contracts. The second chapter studies relational contracts with partially persistent states, where the distribution of the state depends on the previous state. When the states are observable, the optimal contracts can be stationary, and the self-enforcement leads to the dynamic enforcement constraint as with i.i.d. states. The chapter then applies the results to study the implications for the markets where the principal and the agent can be matched with new partners. The third chapter studies preference for delegation when there is a possibility of learning before taking an action. The optimal action depends on the unobservable state. After the principal chooses the manager, one of the agents may receive a private signal about the world. The agent decides whether to disclose the signal to the manager, and the manager chooses an action. In an equilibrium, the agents' communication strategies depend on the manager's prior. The principal prefers a manager with some difference in prior belief to a manager with the same prior.

Author: Christine Hauser
Publisher:
ISBN:
Category : Child support
Languages : en
Pages : 284

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Author: Gokce Uysal
Publisher:
ISBN:
Category : Contracts
Languages : en
Pages : 348

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Author: Eva I. Hoppe-Fischer
Publisher: Springer
ISBN: 3658241330
Category : Business & Economics
Languages : en
Pages : 211

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Contract theory, which emphasizes the importance of unverifiable actions and private information, has been a highly active field of research in microeconomics in the last decades. This thesis is divided into two parts. Part I consists of three chapters that study contract-theoretic models which are motivated by the classic procurement problem of a principal who wants an agent to deliver a certain good or service. In such models it is typically assumed that decision makers are interested in their own monetary payoffs only. Moreover, they have unlimited cognitive abilities and behave in a perfectly rational way. Yet, in practice people often do not behave this way. While empirical research is very difficult in contract theory, laboratory experiments have recently turned out to be an important source of data. In Part II, three experimental studies are presented that investigate contract-theoretic problems brought up in Part I.