Producer Protection Legislation and Termination Damages in the Presence of Contracting Frictions

This study models producer protection legislation that would grant growers the right to claim damages (PPLD) if their contracts are prematurely terminated. In the absence of contracting frictions that prevent contractors from redesigning contracts to accommodate exogenous policy changes, PPLD would not be distortionary or redistributive. If contracting frictions exist, then PPLD would have efficiency and redistributive effects, though the direction and magnitude depends on the size of PPL damages vis-à-vis expected damages under existing contract law. This study clarifies the conditions under which PPLD would decrease efficiency and protect growers.agricultural policy, moral hazard, producer protection legislation, contracts, contract law

Social Preferences and Relational Contracting Performance: An Experimental Investigation

We examine how social preferences affect behavior and surplus in relational contracts. Experimental subjects participate in a contracting environment similar to Brown, Falk, and Fehr [Brown, M., Falk, A. & Fehr, E., “Relational Contracts and the Nature of Market Interactions, Econometrica, 72 (2004):747-780] and in social preference experiments adapted from Charness and Rabin [Charness, G. & Rabin, M. “Understanding Social Preferences with Simple Tests.” The Quarterly Journal of Economics 117(2002): 817-869]. Subjects’ behavior during the Charness and Rabin experiment is a significant predictor of behavior and outcomes observed during the subsequent multi-period, finite-horizon, relational- contracting environment, which features market power, unenforceable performance, reputation formation and endogenous matching of trading partners. Compared to subjects who respond to the Charness-Rabin games in a fashion consistent with purely self-interested, competitive or reciprocal social preferences, buyers and sellers with alternative social preference structures engage in contracts with substantially higher quality and price, which leads to greater surplus for both parties. A key difference is that self-interested, competitive and reciprocal buyers respond to early-period shirking by extending subsequent offers that are less generous to the seller, while buyers with other social preferences extend subsequent offers that are more generous. Reciprocal and competitive sellers and, to a lesser extent, self-interested sellers, deliver sub-contractual levels of quality more often, which substantially lowers buyer and total welfare. We conclude that intentional or ‘cold’ measures of social preferences have considerable predictive power in dynamic, interactive (or ‘hot’) economic settings.Contracts; relational contracts; implicit contracts; market interaction; experimental economics; repeated transaction; social preferences.

Naughty or nice? Punishment and the interaction of formal and informal incentives in long-term contractual relationships

The paper develops a model of repeated interaction between a buyer and a seller, which is then tested via laboratory experiments. The model allows for both formal and informal incentives in the contractual relationship between the parties. Formal incentives are explicit, performance-conditioned obligations enforced by third parties, such as a binding bonus paid for meeting an objectively measurable criterion. Informal incentives are non-binding promises to reward good performance. Although they are not enforced by external institutions, parties engaged in long-term interactions have incentives to “keep their words” about these promises and such payments can provide motivation for desirable performance. The current literature posits that these two types of incentives can function either as complements, so that joint use leads to better outcomes than either alone, or as substitutes, so that the availability of formal incentives may actually undermine the effectiveness of informal incentives. This study uses laboratory experiments to provide a rigorous test of hypotheses about the interaction of these incentives. The observed results suggest that the complementarity effect occurs in certain situations, but that the substitution effect does not occur as predicted, possibly because people do not punish transgressions in the manner that the theoretical model assumes.Relational contracts, experimental economics

The Effect of Intragroup Communication on Preference Shifts in Groups

We use a laboratory gift-exchange game to examine decisions made by groups under three different procedures that dictate how group members interact and reach decisions in comparison to individuals acting alone. We find that group decisions do deviate from those of individuals, but the direction and magnitude of gift exchange depend critically on the procedure. This suggests that no general statements can be made concerning the propensity of groups to exhibit reciprocal or other-regarding behavior relative to individuals. The rules governing how group members can express their preferences and expectations to other group members are critical for determining group outcomes.group behavior, teams, decision making, social preferences

Loss Aversion and Reference Points in Contracts

Loss aversion has become the dominant alternative to expected utility theory for modeling choice under uncertainty. The setting of the base payment in contracts provides an interesting application of referenced based decision theory. The impact of loss aversion on contract structure depends critically on whether reservation opportunities (outside options) are evaluated with respect to the reference point implied in the contract. We show that when reservation opportunities are independent of the reference point, reward contracts are optimal. However, when reservation opportunities are evaluated against the reference point, then penalty contracts are more efficient.Risk and Uncertainty, L14, D81, D21, D82,

THE WELFARE EFFECTS OF BANNING TOURNAMENTS WHEN COMMITMENT IS IMPOSSIBLE: SOME RESULTS FROM THE BROILER SECTOR

We consider the implications of banning tournament contracts and replacing them with fixed performance standard contracts in a multi-period model where the principal cannot commit to future contract parameters. A ban cannot increase total surplus in a static model. In a dynamic model, however, a ban of tournaments can increase total surplus by mitigating the ratchet effect. Calibrating our model to published data from the broiler sector, we find that a ban on use of contemporaneous and lagged relative performance data does not improve total surplus under most circumstances but could increase total surplus in a few instances of low wealth and unitary relative risk aversion. A more enforceable, period-by-period ban is even less likely to be welfare enhancing and does not hinder the principal from redistributing a fixed compensation pool from low ability growers to high ability growers.Livestock Production/Industries,

AJAE Appendix: Contract Enforcement, Social Efficiency, and Distribution: Some Experimental Evidence

The material contained herein is supplementary to the article named in the title and published in the American Journal of Agricultural Economics, May 2007, Volume 89, Issue 2.Marketing,

AJAE Appendix: Tournaments, Fairness, and Risk

The material contained herein is supplementary to the article named in the title and published in the American Journal of Agricultural Economics, Volume 88, Number 3, August 2006.Research Methods/ Statistical Methods, Risk and Uncertainty,

Do the Selfish Mimic Cooperators? Experimental Evidence from Finitely-Repeated Labor Markets

Experimental studies have consistently shown that cooperative outcomes can emerge even in finitely repeated games. Such outcomes are justified by existing reputation building models, which suggest that cooperative outcomes can be sustained if some subjects have other-regarding preferences. While the existence of other-regarding preferences is typically used to justify experimental outcomes, we are unaware of empirical studies that explicitly examine the interaction between cooperators (those with other-regarding preferences) and selfish subjects in sustaining cooperation. In this paper, we classify subjects as either selfish or cooperative using simple social preference games and then test for behavioral differences between the two types in a finitely-repeated labor market with unenforceable worker effort. Theory predicts, and our data confirms, that (1) selfish players mimic the actions of cooperators when trading partners can track the individual reputation of past partners and (2) selfish and cooperative types act differently when individual reputations cannot be tracked.contracts, relational contracts, implicit contracts, market interaction, experimental economics, repeated transaction, social preferences, reputation, firm latitude, finitely-repeated games

TOURNAMENTS, RISK PERCEPTIONS, AND FAIRNESS

This paper reports the results of an economic experiment investigating human subjects' preferences for two types of contracts tournaments and fixed performance standard contracts. Willingness to pay data was elicited through an auction and results suggest that subjects prefer fixed performance standard contracts to tournaments. Primary drivers of this result appear to be subjects' perceptions that tournaments are more risky and less fair than fixed performance standard contracts. Surprisingly, measures of the relative profitability of the contracts did not correlate with willingness to pay. Our results can shed light on why agricultural producers express frustration over tournaments and can provide insights on contract and policy design.Research Methods/ Statistical Methods,