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We propose a security design model in which a potential acquirer approaches a firm with a value-add plan. The target has a single owner, who possesses private information: he alone knows whether his firm is compatible with the plan. The owner agrees that the acquirer will add value but believes that the value-add will not be as much as what the acquirer expects. Although the acquirer can choose any monotone limited liability security to offer along with cash, we show that, under general conditions, any security that is employed always takes the form of nonrecourse debt provided by the seller. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online [ABSTRACT FROM AUTHOR]

How are contracts structured in the presence of relationship-specific investments when legal enforcement is weak? Using a new audit methodology, we show that simple financial contracts in combination with social norms and reputation concerns can sustain relationship-specific transactions. Wholesalers in the market for pens in India use upfront payments rather than increased risk premiums to mitigate risks arising from relationship-specific investments. Upfront payments for printed pens cover only 40 percent of the production costs, highlighting the importance of upfront payments as a screening device. Ex-post, renegotiation is more likely for printed pens, but in a substantial fraction of cases, renegotiation fails. [ABSTRACT FROM AUTHOR]

One way in which governments foster sustainable homebuilding and housing is by subsidizing single homes' investment in sustainability technologies. The problem with these programs is that they incentivize inefficient investment by supporting technologies that make technical and economic sense on a small scale. Furthermore, this arrangement constitutes a flawed marketing system, producing a limited impact on global well-being and sustainability in the long term, as it rules out more efficient sustainability technologies. This paper addresses these shortcomings by designing a public policy proposal based on a contract between the government and homeowners that incentivizes the adoption of collective sustainable technologies, changing the marketing system with a shift in the behavior of a dominant actor, the government. Results indicate that an equilibrium in which the homeowners choose to participate in the new collective program in exchange for a subsidy is feasible and stable. Moreover, the generalization of the proposed program may generate a new way to incentivize the more efficient use of sustainable home technologies in the long run. [ABSTRACT FROM AUTHOR]

We develop an equilibrium model with moral hazard, which arises because some productivity shocks are privately observed by firm managers only. We characterize the optimal contract and its implications for firm size, growth, and managerial pay-performance sensitivity and exploit them to quantify the severity of the moral hazard problem. Our estimation suggests that unobservable shocks are relatively modest and account for about 10 |$\%$| of the total variation of firm output. Nonetheless, moral-hazard-induced incentive pay is quantitatively significant and accounts for 50 |$\%$| of managerial compensation. Eliminating moral hazard would result in about a 1 |$\%$| increase in aggregate output. [ABSTRACT FROM AUTHOR]

I show that stochastic contracts generate powerful incentives when agents suffer from probability distortion. When implementing these contracts, the principal can target probability distortions in order to inflate the agent's perceived benefits of exerting high levels of effort. This novel source of motivation is absent in contracts traditionally regarded as optimal. A theoretical framework and an experiment demonstrate that stochastic contracts implemented with small probabilities, which expose the agent to a high degree of risk, generate higher performance than cost‐equivalent contracts with lower or no risk exposure. I find that probability distortions that result from likelihood insensitivity—cognitive limitations that prevent the accurate evaluation of probabilities—account for this finding. The results highlight the limits of contracts traditionally regarded as optimal. [ABSTRACT FROM AUTHOR]

We study a repeated principal–agent model with transferable utility, where the principal's evaluation of the agent's performance is subjective. Our focus is on equilibria that are robust to the addition of small privately observed shocks to the payoffs. Existing constructions of positive‐effort equilibria are not robust to such payoff shocks. Allowing for simultaneous cheap‐talk announcements makes some effort sustainable in a robust equilibrium, and payoffs can be arbitrarily close to fully efficient ones if players are sufficiently patient. In contrast to the existing literature, our near‐efficient equilibria exhibit realistic features: the bonus size is reasonable, the threshold for being paid a bonus is nontrivial, and the base wage need not be negative. [ABSTRACT FROM AUTHOR]

A principal provides incentives for independent agents. The principal cannot observe the agents' actions, nor does she know the entire set of actions available to them. It is shown that an anti‐informativeness principle holds: very generally, robustly optimal contracts must link the incentive pay of the agents. In symmetric and binary environments, they must exhibit joint performance evaluation—each agent's pay is increasing in the performance of the other. [ABSTRACT FROM AUTHOR]

We argue that risk sharing motivates the bankwide structure of bonus pay. In the presence of financial frictions that make external financing costly, the optimal contract between shareholders and employees involves some degree of risk sharing whereby bonus pay partially absorbs negative earnings shocks. Using payroll data for |$1.26$| million employee-years in all functional divisions of Austrian, German, and Swiss banks, we uncover several empirical patterns in bonus pay that are difficult to rationalize exclusively with incentive theories of bonus pay but that support an important risk sharing motive. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

A buyer wishes to purchase a durable good from a seller who in each period chooses a mechanism under limited commitment. The buyer's value is binary and fully persistent. We show that posted prices implement all equilibrium outcomes of an infinite‐horizon, mechanism‐selection game. Despite being able to choose mechanisms, the seller can do no better and no worse than if he chose prices in each period, so that he is subject to Coase's conjecture. Our analysis marries insights from information and mechanism design with those from the literature on durable goods. We do so by relying on the revelation principle in Doval and Skreta (2022). [ABSTRACT FROM AUTHOR]

We argue that mergers among market laggards (new entrants or innovation challengers) should be treated differently than those involving leaders (established players or first-mover innovators). We show that these mergers can be rivalry-enhancing, either by accelerating entry or promoting innovations, leading to lower quality-adjusted prices and higher consumer surplus. This is more likely to happen when entry (or innovation) costs are relatively high, so that entry (or innovation) is profitable only when it is limited to a few players. In these circumstances, if laggards enter, they will do so probabilistically and inefficiently since each of them would have to condition its entry to scenarios in which other laggards stay out, which may not be possible since entry decisions are secret. By removing or mitigating this coordination failure, a merger among laggards may lead to more entry (or innovation). Such a merger will also be more likely to benefit consumers when the products of laggards and leaders are sufficiently differentiated—that is, when competition is not too intense absent the merger. Importantly, we find that in the presence of fixed entry costs and endogenous entry, fixed cost synergies are relevant for assessing the welfare effects of mergers. These efficiencies enhance the social value of mergers among laggards insofar as they make entry into the market for the merged entity less costly, thereby expanding the spectrum of products available to consumer and increasing their welfare. [ABSTRACT FROM AUTHOR]

We study the delegation problem between a principal and an agent, who not only has better information about the performance of the available actions but also superior awareness of the set of actions that are actually feasible. We provide conditions under which the agent finds it optimal to leave the principal unaware of relevant options. By doing so, the agent increases the principal's cost of distorting the agent's choices and increases the principal's willingness to grant him higher information rents. We further show that the principal may use the option of renegotiation as a tool to implement actions that are not describable to her at the contracting stage. If the agent renegotiates, his proposal signals information about the payoff state. Due to her limited awareness, the principal makes a coarse inference from the agent's recommendations and, as a result, accepts a large number of the agent's proposals, which ultimately benefits both. [ABSTRACT FROM AUTHOR]

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This paper builds a model of dynamic tournaments under incomplete contract situations to analyze how the government, as a national development strategy, induces incentives or forms of competition between multiple companies (between state-owned enterprises (SOEs), between private-owned enterprises (POEs), or between SOEs and POEs) in the long-run. This paper can be considered as a model analysis of “controlled competition” under “State Capitalism”, in which the government participates in the market as an active player, such as in China, Singapore, and in a broad sense, in Japanese Industrial Policy in the past. In addition to clarifying the incentive mechanism embedded in this model, we also examine the problems and areas for improvement from the perspective of incentive design. In particular, in the long-term competition between two heterogeneous companies, it would be a beneficial policy for the government if the feedback effect could be mitigated by handicapping the winner and favoring the loser, thereby restoring the competitive pressure that had decreased. At the same time, as excessive competition-inhibiting discriminatory prizes (“Cronyism”) greatly impede investment incentives for both companies, these can be viewed as a ''government failure'', and thus the institution should be redesigned to correct such obstacles, thereby maintaining appropriate competitive pressures.

We study the effects of property rights over the use of data on market outcomes. To do so, we consider a model in which a monopolistic firm offers a service to a set of heterogeneous users. The use of the service generates valuable data, but data monetization entails a privacy cost for users. A trade-off emerges between under-processing and over-monetization of data. We show that both the firm and users prefer the users (the firm) to own the rights for low (high) values of data. We further discuss the robustness of our results when allowing more possible contracts for the data owner and show that the main trade-off is robust to these extensions. [ABSTRACT FROM AUTHOR]

We examine the pecuniary externalities that arise when active fund manager compensation contracts have common components. This commonality in the compensation structure and loadings on each component across funds reduces asset price informativeness, amplifies the distortions from active managers' benchmark-hedging demand, and lowers the price of risk in financial markets. This is because contract commonality distorts investors' capital allocation to active management, and active managers' information acquisition and trading decisions. From a normative perspective, contract commonality increases the rigidity of the active industry size and performance-based fee. As a result, they do not vary enough with financial market conditions compared with a Planner's economy. Quantitatively, an increase in asset payoff uncertainty increases the size and performance-based fee twice as much in the Planner economy compared with the decentralized economy. From a positive perspective, contract commonality contributes to the inconsistency of several widely adopted measures of active manager skill. [ABSTRACT FROM AUTHOR]

We study contracting when both principal and agent have to exert noncontractible effort for production to take place. An analyst is uncertain about what actions are available and evaluates a contract by the expected payoffs it guarantees to each party in spite of the surrounding uncertainty. Both parties are risk‐neutral; there is no limited liability. Linear contracts, which leave the agent with a constant share of output in exchange for a fixed fee, are optimal. This result holds both in a preliminary version of the model, where the principal only chooses to supply or not supply an input, and in several variants of a more general version, where the principal may have multiple choices of input. The model thus generates nontrivial linear sharing rules without relying on either limited liability or risk aversion. [ABSTRACT FROM AUTHOR]

We consider dynamic processes of coalition formation in which a principal bargains sequentially with a group of agents. This problem is at the core of a variety of applications in economics, including lobbying, exclusive deals, and acquisition of complementary patents. In this context, we study how the allocation of bargaining power between principal and agents affects efficiency and welfare. We show that when the principal's willingness to pay is large relative to agents' payoffs for completion, efficiency requires concentrating bargaining power in the principal. Strengthening the bargaining position of the agents increases inefficient delay and reduces agents' welfare. This occurs in spite of the lack of informational asymmetries or discriminatory offers. When this collective action problem is severe enough, agents are better off when bargaining power is concentrated in the principal. [ABSTRACT FROM AUTHOR]

We study theoretically and empirically the relation between altruism and incentive contract design. Theoretically, we extend Fischer and Huddart (2008) to investigate how social norms reinforce managers' altruistic preferences, thus affecting the optimal contract design related to incentive strength and performance measurement. Empirically, we draw on the notion of an organization's work climate to capture managers' altruistic preferences. Using data collected from a sample of 557 managers, we find that in a work climate where managers are mostly out for themselves, firms have lower pay-for-performance sensitivity and place a greater weight on aggregate performance measures. In addition, respondents report that they engage more in undesirable actions that are unproductive and costly to firm owners. In contrast, in a work climate where managers care about others (including peers in their organizational unit), firms place lower weights on aggregate performance measures. At the same time, respondents report that they supply more effort and engage less in undesirable actions. [ABSTRACT FROM AUTHOR]

The founder of a start‐up (principal) who has a project with uncertain returns must retain and incentivize an agent using promise of future payments and information gathering. The agent's effort incrementally advances production and such advance is a prerequisite for gathering new information. The principal decides how much information to gather based on these incremental advancements. The principal faces cash constraints. The agent's outside option is large relative to his effort cost. Equilibrium features one of two outcomes: immediate learning, whereby the agent's compensation is low, learning is immediate and retention is possible only conditional on the project being of high quality; or gradual learning, whereby the agent's compensation is high, learning is gradual, the agent never quits and effort is inefficiently high. [ABSTRACT FROM AUTHOR]

Motivated by the growing discussion on the resemblance of multilevel marketing schemes to pyramid scams, we compare the two phenomena based on their underlying compensation structures. We show that a company can design a pyramid scam to exploit a network of agents with coarse beliefs and that this requires the company to charge the participants a license fee and pay them a recruitment commission for each of the people that they recruit and that their recruits recruit. We characterize the schemes that maximize a company's profit when it faces fully rational agents, and establish that the company never finds it profitable to charge them a license fee or pay them recruitment commissions. [ABSTRACT FROM AUTHOR]

We study how an organization should dynamically screen an agent of uncertain loyalty whom it suspects of committing damaging acts of undermining. The organization controls the stakes of the relationship, while the agent strategically times undermining, which can occur repeatedly and is detected only stochastically. The optimal commitment stakes policy exhibits both discreteness and gradualism, with distinct "untrusted" and "trusted" phases featuring gradually rising stakes during the untrusted phase and a discrete gap in stakes between phases. This policy is also the equilibrium outcome when the organization cannot commit, and the agent's equilibrium undermining policy exhibits variable, non-monotonic intensity. [ABSTRACT FROM AUTHOR]

In this paper, we study the conditions under which termination is a useful incentive device in the canonical dynamic principal‐agent moral hazard model of Sannikov (2008). We find that temporary suspension of the agent after poor performance dominates termination if the principal's outside option is low and the agent's outside option is moderate. In suspension, the agent performs tasks free of moral hazard and receives no compensation, which rebuilds his "skin in the game" and allows for incentives to be restored without terminating. If the agent's outside option is low, suspension is ineffective because it rebuilds the agent's skin in the game too slowly. If the agent's outside option is high, the profitability of the relationship with the agent is low, so the principal prefers to terminate rather than extend the relationship through temporary suspension. Because the optimal use of suspension versus termination after poor performance can be highly sensitive to the principal's and agent's outside options, similar jobs can have vastly different average job durations, purely for incentive reasons. [ABSTRACT FROM AUTHOR]

In this paper, I study the dynamic delegation problem in a principal–agent model wherein an agent privately observes a persistently evolving state, and the principal commits to actions based on the agent's reported state. There are no transfers. While the agent has state‐independent preferences, the principal wants to match a state‐dependent target. I solve the optimal delegation in closed form, which sometimes prescribes actions that move in the opposite direction of the target. I provide a simple necessary and sufficient condition for that to occur. Generically, the principal fares strictly better in the optimal delegation than in the babbling outcome. Over time, the principal is worse off in expectation, but the agent is better or worse off depending on the shape of the principal's state‐dependent target. [ABSTRACT FROM AUTHOR]