Incomplete Contingent Labor Contract, Asymmetric Residual Rights and Authority, and the Theory of the Firm

In the paper the trade-offs among endogenous transaction costs caused by two-sided moral hazard, exogenous monitoring cost, and economies of specialization are specified in a Grossman, Hart and Moore (GHM) model to absorb Maskin and Tirole’s recent critique and Holmstrom and Milgrom’s criticism of the model of incomplete contract. The extended GHM model allowing incomplete contingent labor contract as well complete contingent contract of goods trade is used to explore the implications of structure of ownership and residual rights for the equilibrium network size of division of labor and productivity.theory of the firm, incomplete labor contract, asymmetric authority, two-sided moral hazard, transaction cost, asymmetric residual rights, division of labor, specialization

Partial Privatization and Incomplete Contracts: The Proper Scope of Government Reconsidered

In this paper it is argued that privatization is not the only alternative to public ownership. Adopting the incomplete contract approach, it is shown that partial privatization may well be the optimal ownership structure. While in the standard incomplete contract model joint ownership is usually dominated, it is shown here that joint ownership in the form of partial privatization can be optimal since it mitigates the disadvantages of public ownership (no incentives to improve quality if the manager invests or too strong incentives if the government invests) and of privatization (too strong incentives for the manager to reduce costs).Partial Privatization; Public Ownership; Incomplete Contracts

Incomplete Information, Renegotiation, and Breach of Contract

Once a contract has been agreed by two agents, the problem of renegotiating breach under two-sided asymmetric information on the agents' outside options is equivalent to the problem of bilateral trade with uncertain gains. Thus, the theorem of Myerson and Satterthwaite (1983) implies the impossibility of efficient renegotiation. We also show that, assuming no renegotiation, the optimal breach mechanism in this setting corresponds to the expectation damage rule.Contract Breach

Borrowing Constraint as an Optimal Contract

We study a continuous-time version of the optimal risk-sharing problem with one-sided commitment. In the optimal contract, the agent's consumption is non-decreasing and depends only on the maximal level of the agent's income realized to date. In the complete-markets implementation of the optimal contract, the Alvarez-Jermann solvency constraints take the form of a simple borrowing constraint familiar from the Bewley-Aiyagari incomplete-markets models. Unlike in the incomplete-markets models, however, the asset buffer stock held by the agent is negatively correlated with income.Borrowing constraint, limited commitment

Relational contracts as a foundation for contractual incompleteness

Contractual incompleteness is generally defined by a trade-off between costs and benefits. We examine this trade-off in a dynamic setting and show how the ability of the parties to sustain a relational contract leads to more incomplete contracts.Contractual incompleteness, Relational Contract, Reputation, Repeated Games

Incomplete Contracts in Dynamic Games

I develop a dynamic model of costly private provision of public goods where agents can also invest in cost-reducing technologies. Despite the n+1 stocks in the model, the analysis is tractable and the (Markov perfect) equilibrium unique. The frame-work is used to derive optimal incomplete contracts in a dynamic setting. If the agents can contract on provision levels, but not on investments, they invest suboptimally little, particularly if the contract is short-term or close to its expiration date. To encourage sufficient investments, the optimal and equilibrium contract is more ambitious if it is short-lasting, and it is tougher to satisfy close to its expiration date. If renegotiation is possible, such a contract implements the first best. The results have important implications for how to design a climate treaty.Dynamic private provision of public goods, dynamic common-pool problems, dynamic hold-up problems, incomplete contracts, renegotiation design, climate change and climate agreements JEL Classification Numbers: D86, H87, Q54, F53

Reputations, Relationships and the Enforcement of Incomplete Contracts

This paper discusses the literature on the enforcement of incomplete contracts. It compares legal enforcement to enforcement via relationships and reputations. A number of mechanisms, such as the repeat purchase mechanism (Klein and Leffler (1981)) and efficiency wages (Shapiro and Stiglitz (1984)), have been offered as solutions to the problem of enforcing an incomplete contract. It is shown that the efficiency of these solutions is very sensitive to the characteristics of the good or service exchanged. In general, neither the repeat purchase mechanism nor efficiency wages is the most efficient in the set of possible relational contracts. In many situations, total output may be increased through the use of performance pay and through increasing the quality of law.contract, law and economics, reputation, repeated games, incomplete contracts, transactions costs, institutional economics, contract enforcement

A Note On Optimal Insurance in an Information Constrained Federal Economy with Incomplete Degree of Enforceability and Negotiation Costs

This paper studies the constrained efficient intergovernmental transfer contract between the central government and the states in a federal economy. We consider an environment with moral hazard, incomplete enforceability and date 0 negotiation costs. The interaction of moral hazard and incomplete enforceability may imply that when the state’s resources are ”low enough”, it is constrained efficient that the state gets a lower utility level than in autarky. When negotiation costs are considered, the state might not accept the contract. More importantly, the possibility of whether accepting or not is not monotonically determined by the state’s fiscal situation.

Business Dynamics and Informal Contracts: Experimental Evidence from the Cowpea Street Food Sector in West Africa

We use field experiments in Niger to investigate the nature and efficiency of contractual structures in market transactions between kossai vendors and cowpea grinders (key input suppliers). Three contractual structures were employed: gift contract, standard price contract and discretionary bonus contract (most incomplete). Gift contracts and standard price contracts involve an upfront payment of grinding fees where discretionary bonus contracts involve payment after the quality of service is observed. Gift contracts were found to be the most ex-ante efficient with the highest acceptance rates. Discretionary bonus contracts (most incomplete) were the most ex-post efficient that is, resulted in the highest quality. Our results suggest that the degree of incompleteness of different contractual structures influences the outcome of market transactions in the cowpea street food sector in West Africa.Incomplete contracts, Street food vendors, Experimental economics, International Development,