Third parties as an incentive to comply

Within an incomplete contract setting, the paper analyses the role of third parties in ameliorating incentive problems arising in the context of financial contracts with costly verification. Contrary to the findings of the bilateral lender-borrower relationship, characterised by no information revelation and a breakdown of the market, it is shown that, in the presence of third parties, an optimal contract exists and has partial information revelation. The importance of third parties is therefore not limited to improving efficiency, as it is when the contract offer comes from the informed party, but to ensure project realisation, and thus to ensure that the surplus that can arise from the project does not get lostBargaining power; contracts; costly state verification

Sorting the Good Guys from Bad: On the Optimality of Deterministic Audit with Ex-Ante Information Acquisition

In a costly state verification model under commitment the principal may acquire a costly public and imperfectly revealing signal before or after contracting. If the project remains profitable after all signal realisations, optimally the signal is collected, if at all, after contracting, and it may be acquired randomly or deterministically. Moreover, audit is deterministic and targeted on some signal-state combinations. The paper provides a detailed characterisation of the optimal contract and performs a comparative static analysis of signal acquisition strategy and payoffs with respect to enforcement costs and informativeness of the signal. We explore robustness of the results, including commitment issues.contracts, auditing, ex-ante information

A Simple Impossibility Result in Behavioral Contract Theory

The paper analyses, within a moral hazard scenario, a contract between an agent with anticipatory emotions and a principal who responds strategically to those emotions. The agent receives a private signal on the profitability of the task he was hired for. If the signal is informative about the return from effort, the agent would benefit from knowing accurate news. However, if the agent derives utility from the anticipation of his final payoff, the suppression of a bad signal may induce a positive interim emotional effect. We show that it may be impossible to achieve the first-best, even though the risk-neutral parties are symmetrically informed at the contracting stage and complete contracts can be written.Hidden action, anticipatory utility.

Taxing and regulating vices

We study the optimal taxation and regulation of sin goods – goods that are enjoyable to consume but also create future negative health consequences – within a setting in which individuals are time‐inconsistent (and thus consume too much), regulation makes the consumption of sin goods less pleasurable, and taxation involves administrative and compliance costs. In contrast to previous literature, we find that regulation can be beneficial even when corrective taxes are available and individuals are homogeneous. Moreover, despite the inefficiencies associated with the use of both instruments, the consumption of the sin good might fall short of the first best. The results are robust to consumers’ heterogeneity