Repeated Two-Sided Moral Hazard

In this paper I study a class of repeated two-sided moral hazard problems with discounting. I consider two agents who are involved in multiperiod, and possibly infinite-horizon, contractual relationships. In every period, the agents simultaneously take hidden actions, each of which independently affects the distribution of a separate random public signal. The realizations of the public signals jointly determine the output of a perishable final good, which the agents consume. This abstract framework can be used to analyze contractual relations within a variety of institutions, such as partnership firms, households, or cooperatives, in which bilateral moral hazard is an essential feature. I examine the nature of Pareto optimal contracts in this environment that respect both technological and informational constraints. After establishing the existence of optimal contracts, I show that every continuation contract of an optimal contract is itself optimal. Using this recursive property, next I derive a partial, but fairly general, characterization of optimal consumption allocations. It is an equation that links the ratio of marginal utilities of the agents in the current period to the same ratio in the next period. Moreover, optimal contracts imply that the sequence of ratios of marginal utilities in each period is a submartingale. I provide sufficient conditions for the submartingale to converge. Finally, using this result, I identify conditions under which one agent receives all surplus in the long run.

Moral hazard and lack of commitment in dynamic economies

We revisit the role of limited commitment in a dynamic risk-sharing setting with private information. We show that a Markov-perfect equilibrium, in which agent and insurer cannot commit beyond the current period, and an infinitely-long contract to which only the insurer can commit, implement identical consumption, effort and welfare outcomes. Unlike contracts with full commitment by the insurer, Markov-perfect contracts feature non-trivial and determinate asset dynamics. Numerically, we show that Markov-perfect contracts provide sizable insurance, especially at low asset levels, and are able to explain a significant part of wealth inequality beyond what can be explained by self-insurance. The welfare gains from resolving the commitment friction are larger than those from resolving the moral hazard problem at low asset levels, while the opposite holds for high asset levels.Moral hazard ; Risk

DERIVING FEEDER CATTLE PRICING CONTRACTS FROM FED CATTLE PRICE GRIDS: SIMULATION RESULTS OF RISK-SHARING CONTRACTS

Post-slaughter quality-based pricing of cattle is increasingly common. This quality, however, is dependent upon unobservable quality characteristics of the feeder cattle used as inputs. Through stochastic simulation we construct incentive compatible quality risk-sharing contracts based upon final grid-quality schedules that facilitate input quality sorting in the feeder cattle market.Marketing,

Double Sided Moral Hazard and Share Contracts in agriculture

This paper develops a double-sided moral hazard model of share contract in agriculture, with imperfect quality measurement by the agent and the principal, who contribute to the final good quality in terms of production effort and marketing effort respectively. Using this model, we analyse the implications of the share contract for quantity and quality, often ignored in previous analysis. With the help of a simulation exercise, we prove that the outcome-conditioned share generally weakens the agent´s incentive to make effort in quality input. This finding could explain the contractual evidence in some differentiated markets such as the wine market, where bottle-price conditioned contracts are rarely used.share-contract, double moral-hazard, quality, Farm Management,

Ricardian Equivalence with Incomplete Household Risk Sharing

Several important empirical studies (e.g., Altonji, Hayashi, and Kotlikoff, 1992, 1996, 1997) find that households are not altruistically-linked in a way consistent with the standard Ricardian model, as put forward by Barro (1974). We build a two-sided altruistic-linkage model in which private transfers are made in the presence of two types of shocks: an 'observable' shock that is public information (e.g., public redistribution) and an 'unobservable' shock that is private information (e.g., idiosyncratic wages). Parents and children observe each other's total income but not each other's effort level. In the second-best optimum, unobservable shocks are only partially shared whereas, for any utility function satisfying a condition derived herein, observable shocks are fully shared. The model, therefore, can generate the low degree of risk sharing found in the recent studies, but Ricardian equivalence still holds.

Risk and Insurance in Sharecropping

This essay summarizes some recent empirical contributions on two aspects of sharecropping: (i) the effects of the contractual form (incentive power and contract length) on resource allocation and farm performance; and (ii) the exogenous elements behind the choice of different contractual forms.Empirical, Sharecropping, Survey

Competitive Risk Sharing Contracts with One-Sided Commitment

This paper analyzes dynamic equilibrium risk sharing contracts between profit-maximizing intermediaries and a large pool of ex-ante identical agents that face idiosyncratic income uncertainty that makes them heterogeneous ex-post. In any given period, after having observed her income, the agent can walk away from the contract, while the intermediary cannot, i.e. there is one-sided commitment. We consider the extreme scenario that the agents face no costs to walking away, and can sign up with any competing intermediary without any reputational losses. We demonstrate that not only autarky, but also partial and full insurance can obtain, depending on the relative patience of agents and financial intermediaries. Insurance can be provided because in an equilibrium contract an up-front payment effectively locks in the agent with an intermediary. We then show that our contract economy is equivalent to a consumption-savings economy with one-period Arrow securities and a short-sale constraint, similar to Bulow and Rogoff (1989). From this equivalence and our characterization of dynamic contracts it immediately follows that without cost of switching financial intermediaries debt contracts are not sustainable, even though a risk allocation superior to autarky can be achieved.Long-term contracts, Risk Sharing, Limited Commitment, Competition

Competitive Risk Sharing Contracts with One-Sided Commitment

This paper analyzes dynamic equilibrium risk sharing contracts between profit-maximizing intermediaries and a large pool of ex-ante identical agents that face idiosyncratic income uncertainty that makes them heterogeneous ex-post. In any given period, after having observed her income, the agent can walk away from the contract, while the intermediary cannot, i.e. there is one-sided commitment. We consider the extreme scenario that the agents face no costs to walking away, and can sign up with any competing intermediary without any reputational losses. Contrary to intuition, we demonstrate that not only autarky, but also partial and full insurance can obtain, depending on the relative patience of agents and financial intermediaries. Insurance can be provided because in an equilibrium contract an up-front payment effectively locks in the agent with an intermediary. We then show that our contract economy is equivalent to a consumption-savings economy with one-period Arrow securities and a short-sale constraint, similar to Bulow and Rogoff (1989). From this equivalence and our characterization of dynamic contracts it immediately follows that without cost of switching financial intermediaries debt contracts are not sustainable, even though a risk allocation superior to autarky can be achieved.

The supply and demand side impacts of credit market information

We utilize a unique pair of experiments to study the precise ways in which reductions in asymmetric information alter the outcome in a credit market. We formulate a general model in which the information set held by lenders, and what borrowers believe their lenders to know, enter separately. This model illustrates that non-experimental identification of the supply- and demand-side information in a market will be confounded. We then present a unique natural experiment, wherein a Guatemalan credit bureau was implemented without the knowledge of borrowers, and subsequently borrowers were given a randomized course describing the existence and workings of the bureau. Using this pairing of randomized and natural experiment, we find that the most powerful effect of new information in the hands of lenders is seen on the extensive margin, in their ability to select better clients. Changes in contracts for ongoing borrowers are muted. When borrower in group loans learn that their lender possesses this new information set, on the other hand, we see strong responses on both the intensive margin (changes in moral hazard) and the extensive margin (groups changing their composition to improve performance). We find some evidence that disadvantaged and female borrowers are disproportionately impacted. Our results indicate that credit bureaus allow for large efficiency gains, that these gains are augmented when borrowers understand the rules of the game, and that economic mobility both upwards and downwards is likely to be increased.

Efficient Risk Sharing in the Presence of a Public Good

This paper studies the provision of a public good between two agents under lack of commitment and applies it to the problem of children's consumption in separated couples, where children are considered to be public goods. The custodial mother controls the child's consumption, whereas the father can contribute indirectly by making monetary transfers to the mother, but has no control over how the mother spends them. Using minmax punishments, I look for the Pareto frontier of the Subgame Perfect Equilibrium payoffs, and characterize the equilibrium and long term implications of the model. As in the previous literature, agents' consumptions and continuation values covary positively with their income levels. In the case where the constraint for the public good provision binds, both agents' private consumptions increase relative to the public good provision. In the long run, if some first best allocation is sustainable, the long-term equilibrium will converge to a first best allocation. Otherwise, agents' utilities oscillate over a finite set of values. I then study the theoretical implications of one-sided enforcement when the public good provider has the authority to enforce transfers from the second agent. This is motivated by the wave of US policy reforms to enforce child support payments from fathers. The model predicts an increase in the ratio of the mother's consumption to the child's.insurance, lack of commitment, optimal dynamic contract, public good