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It is common for lenders to require innovative firms to report all innovations and take actions, such as patenting, to protect their value. However, many future innovations are difficult to verify, making enforcement of such requirements difficult. This creates a tension for firms between protecting their innovations through patenting and creating assets that can be liquidated by a lender when not fully repaid. We show that the endogeneity of the patenting decision introduces an upper bound on the long-term payments that can be credibly promised to a lender, affecting the feasibility of obtaining financing and the terms of financial contracts. This paper was accepted by David Sraer, finance. [ABSTRACT FROM AUTHOR]

International Organizations (IOs), such as the United Nations (U.N.), engage in statebuilding in a range of post-conflict states. Statebuilding scholarship largely assumes that IOs, backed by their powerful member states, have at least temporary authority over the seemingly "weak" states in which they intervene. We argue, in contrast, that many post-conflict states shape IO statebuilding efforts through many statebuilding contracts, which we call incomplete arrangements, that give the post-conflict state the residual rights of control over the unnegotiated components of these statebuilding contracts with IOs. These incomplete arrangements, as opposed to complete takeovers, which are the other type of statebuilding contracts, provide procedural "weapons of the weak state" that enable the post-conflict state to influence what the IO mandate contains, where it intervenes, whom it hires, and when it exits. Using in-depth case studies of Burundi, Guatemala, and Timor-Leste, as well as analysis of 36 U.N. interventions in post-conflict states from 2000–2020, this article demonstrates the potential of incomplete arrangement statebuilding contracts to give post-conflict states institutional power over IO statebuilders, with important implications for scholarship on statebuilding and global governance. [ABSTRACT FROM AUTHOR]

This article analyzes the ways heterogenous firms procure their inputs in the presence of relationship‐specific investments and incomplete contracts. We first consider a closed economy in which firms decide how to structure their organization. Production is sequential and inputs (upstream and downstream) are sourced in the same order as production. While our closed‐economy setup is analogous to Antràs and Chor (Econometrica, 2013), there are two distinct features: (1) The reward to each supplier is determined through bargaining over the full revenue of the firm (as opposed to marginal contribution of the supplier), and (2) The reward structure combined with our sequential bargaining protocol gives rise to linkages across suppliers. The analysis in Antràs and Chor (Econometrica, 2013) identifies a mechanism in which upstream organizational decisions have spillover effects on downstream suppliers' investment incentives. Thanks to our novel features, we identify another mechanism: the spillover effects of downstream organizational decisions on the investment incentive of upstream suppliers. Next, we consider an open economy in which firms not only make organizational decisions but also determine where to source their inputs. We show that these decisions are connected between sequential production stages such that the sourcing location of the upstream input may affect the organizational choice in the downstream stage. We then examine how within sectoral heterogeneity and variations in industry characteristics influence the relative prevalence of firms that choose to form different organizational structures. [ABSTRACT FROM AUTHOR]

Incentive contracts often do not govern all task elements for which an employee is responsible. Prior research, particularly in the tradition of principal-agent theory, has studied incomplete incentive contracts as multi-task problems focusing on how to motivate the employee to incur effort for a not-contracted task element. Thus, emphasis is on the "vertical" relation between superior and subordinate, where both are modeled as gifted economic actors. This paper takes another perspective focusing on the "horizontal" interferences of—contracted and not-contracted—task elements across various employees in an organization and, hence, on the complexity of an organization's task environment. In order to disentangle the interactions among tasks from agents' behavior, the paper pursues a minimal intelligence approach. An agent-based simulation model based on the framework of NK fitness landscapes is employed. In the simulation experiments, artificial organizations search for superior performance, and the experiments control for the complexity of the task environment and the level of contractual incompleteness. The results suggest that the complexity of the task environment in terms of interactions among task elements may considerably shape the effects of incomplete incentive contracts. In particular, the results indicate that moderate incompleteness of incentive contracts may be beneficial with respect to organizational performance when intra-organizational complexity is high. This is caused by stabilization of search resulting from incomplete contracts. Moreover, interactions may induce that the not-contracted task elements could serve as means objectives, i.e., contributing to achieving contracted task elements. [ABSTRACT FROM AUTHOR]

Land pawning is considered inefficient because it causes property rights to be unclearly delineated. Despite this, it once prevailed worldwide. We propose that this system flourished when state capacity was weak and the private sector spontaneously managed public affairs. Local collaboration made it difficult to sell land outright to an outsider who might be an unreliable collaborator. Land pawning granted the pawner's family and neighbours a 'probation' period to observe the pawnee's behaviour. If they found the pawnee irresponsible, they could still redeem the land. Data compiled from contracts in Qing Taiwan support our hypothesis. [ABSTRACT FROM AUTHOR]

We examine the rise of "Guard Labor"—defined as occupations devoted to labor extraction—at the commuting zone level in the United States. Between 1950 and 2017 the share of the labor force employed in guard labor increased from 19.5 percent to 29.4 percent. We explore the local labor market correlates of guard labor and validate several predictions of the labor discipline model, while extending the model to the context of contemporary racial capitalism. The share of the labor force employed in guard labor is positively correlated with the household income Gini coefficient, negatively correlated with the fraction of the labor force in a union, and positively correlated with contemporary measures of local racial animosity. Consistent with the labor discipline model, an increase in the share of the labor force employed in supervisory occupations has a significant negative effect on nonsupervisory wages. JEL Classification: O17, P16, Z13, B51, B52 [ABSTRACT FROM AUTHOR]

We build on the experience of the COVID-19 crisis to investigate how a State owned and a private company, such as the national health system, are managed when a crisis may occur. We develop our analysis considering an incomplete contract model. We concentrate our attention on the incentives for economic agents assuming that the State expropriates property rights in the crisis event. The choice between public and private health system depends on three key elements: expropriation degree of the State/power of the private sector, damage of cost reduction innovations, probability of a crisis event. If the probability of the crisis is high, the damage is significant and the contracting power of the manager is strong then public ownership may be optimal because cost innovations are more aligned to the first best solution than in case of a private ownership. [ABSTRACT FROM AUTHOR]

Production cost affects heavily supply chain coordination, but it is uncertain in many cases. We consider a supply chain consisting of a manufacturer and a retailer, where the unit production cost is uncertain when the firms sign a procurement contract. We derive the optimal decisions and profits for the centralised and decentralised cases. We show that production cost uncertainty exaggerates the supply chain's incentive conflict, but may increase the expected profit in the centralised decision case. Then we design an incomplete contract, which sets a wholesale price and an order quantity in the first stage, which the firms can re-negotiate after the production cost is realised in the second stage. We prove that such an incomplete contract can lead to the first best outcome. We further consider the case with asymmetric cost information and show that the incomplete contract can also coordinate the supply chain. Furthermore, we discuss how the degree of contract incompleteness, re-negotiation freedom, and residual control rights affect the supply chain performance. The results reveal that the hold-up problem is prone to occur with improper contract incompleteness, re-negotiation freedom, and residual control rights, while the incomplete contract we propose can effectively avoid the problem. [ABSTRACT FROM AUTHOR]

Real-world contractual agreements between firms are often incomplete, leading to suboptimal investment and loss of value in supply chain relationships. To what extent can blockchain technology help alleviate problems arising from contractual incompleteness? We examine this issue by exploiting a quasi-natural experiment based on the staggered adoption of U.S. state laws that increased firms' in-state ability to develop, adopt, and use blockchain technology. We find that, after exposure to a pro-blockchain law, firms with greater asset specificity exhibit more positive changes to Tobin's Q, research and development, and blockchain-related innovation. Also, such firms appear to rely less on vertical integration, form more strategic alliances, and shift their emphasis to less geographically proximate customers. Overall, our results suggest that blockchain technology can help firms remedy constraints and inefficiencies arising from contractual incompleteness. This paper was accepted by Will Cong, Special Section of Management Science: Blockchains and Crypto Economics. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.04139. [ABSTRACT FROM AUTHOR]

I assess how alternative organizational forms affect the ability of multiple actors to appropriate economic rents in activities expected to create social value—defined as broad social benefits to a given population (including more vulnerable groups) minus their associated provision costs. I simultaneously examine three stylized forms: public bureaucracy, involving both public sponsorship and public management; public–private partnerships, with a mix of public sponsorship and private management; and social enterprise, with both private management and sponsorship from impact-oriented investors. Although the extant literature has underscored a supply-side hazard emerging when actors try to appropriate rents by economizing on noncontractible social dimensions, I also examine the implications of a demand-side tradeoff emerging when providers are tempted to focus on more profitable customer segments and exclude more vulnerable populations. In my framework, distinct organizational forms change the managerial incentives to provide inclusive, high-quality social services based on three main factors: the relative attractiveness of beneficiary segments, their cost structure, and the extent of fixed costs to implement and operate services. I thus offer a testable theory of organizational alignment, identifying the comparative merits of each form based on how they incentivize public and private actors to create and appropriate social value. [ABSTRACT FROM AUTHOR]

An adequate normative economics – one that is consistent with recent developments in our discipline (and in philosophy and psychology) and that resonates with widely held moral intuitions – will have to address the following challenges. First, utility cannot be both the basis of our predictions of economic behaviour and the evaluation of the outcomes of this behaviour. Second, we need to conceive of individual well‐being and other desiderata in ways that are interpersonally comparable and that go beyond efficiency and fairness. Third, the representation of the economy as a 'morality‐free zone' (requiring that contracts, including employment contracts, are complete) must give way to a recognition of the unaccountable exercise of power by private actors, even in a perfectly competitive equilibrium, and the way that this may violate democratic principles and limit the freedom and compromise the dignity of other actors. Fourth, the commitment to 'liberal neutrality' (thereby sidestepping the evaluation of preferences) and the related assumption of 'unrestricted preferences' in mechanism design and public policy must be abandoned, making room for a concern about the nature of our preferences and the ways that institutions shape our values. [ABSTRACT FROM AUTHOR]

This paper develops a model of focal firm-stakeholder interactions incorporating the values of each party and the possible impact of incomplete contracts between them. The paper offers a values-based analysis of the forces driving the interaction between the parties. Firms exist in a web of perceived obligations and rights. We argue that entities in firm-stakeholder relationships have operational goals supported by terminal and instrumental values that affect the way that the parties behave and interact with others. Since various parties to an interaction may have different values and goals, this model allows for strategic interactions. While some relationships are bound by law or contract, others are not. Thus, the outcome cannot be prescribed with certainty, so an important question is whether the desired outcomes can be enforced. We draw upon contract theory to explore these issues, noting that performance under any contract is problematic since it cannot be assured in advance. We argue that the determinants of outcomes between the focal firm and its stakeholder groups are affected by the values and goals of each entity, while the nature of the contracts between them and the environment within which the interactions occur influence what can be achieved. [ABSTRACT FROM AUTHOR]

Previous work has shown that unobservable random shocks on output have a detrimental effect on efficiency in short-term ('static') employment relationships. Given the prevalence of long-term ('dynamic') relationships in firms, we investigate whether the impact of shocks is similarly pronounced in gift-exchange relationships where the same principal-agent pair interacts repeatedly. In dynamic relationships, shocks have a significantly less pronounced negative effect on efficiency than in static relationships. In an attempt to identify the drivers for our results we find that the combination of a repeated-game effect (current misbehavior can be punished in future periods) and a noise-canceling effect (part of the noise cancels out in the long run) is required to avoid the detrimental effects of unobservable random shocks on efficiency. [ABSTRACT FROM AUTHOR]

This article provides a normative justification for unions. It discusses three arguments. The argument from consent justifies unions in some circumstances, but if the employer prefers to not bargain with unions, it may provide very little justification. The argument from contestability takes as its starting point the fact that employment contracts are incomplete contracts, where authority takes the place of complete contractual terms. This theory of contracts implies that consent to authority has been given under ignorance, and, therefore, that authority cannot be justified by consent. Contestability is a mechanism that can handle this problem for consent theory. It demands transparency, channels for voice, and a forum where contestations can be evaluated. This idea can be implemented in firms in different ways, but the argument from the separation of powers implies that unions are uniquely suited to implement contestability, since they are organized outside of the employer's domain of authority. [ABSTRACT FROM AUTHOR]

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This paper reviews the Roman tax collection system since the Late Republic to the Principality, focusing on the transition from the tax-farming system to a more centralized, census-based administration. We attempt to justify this transition according to New Institutional Economic theories (Transaction Cost Economics and Property Rights Theory). The paper argues that, during the Republic, the auction-based system of tax farming ended up giving place to opportunistic behaviors and abusing practices due to information asymmetries and contract incompleteness, enhanced by the collusion of tax farmers and governors. The Principality improved the efficiency of the tax collection system through the introduction of a bureaucratic and census-based administration, which allowed imperial employees to monitor the tax-farming activities. [ABSTRACT FROM AUTHOR]

Motivated by challenges facing IT procurement, this paper studies a hybrid procurement model in which a reverse auction of a fixed-price IT outsourcing contract may be followed by renegotiation to extend the contract's scope. In this model, the buyer balances the needs to incentivize noncontractible vendor investment and to curb the winning vendor's information rent by choosing the initial project scope and the buyer's investment in the quality of the project. We find that a buyer may benefit from inducing ex post renegotiation to motivate vendor investment, especially when the winning vendor has high bargaining power and the quality uncertainty is low. Broadening the initial scope reduces information rent but leaves little room for ex post renegotiation and, hence, discourages vendor investment, whereas increasing the buyer's investment has opposite effects. Interestingly, the two measures can be strategic substitutes or complements depending on the likelihood of the renegotiation and the two parties' bargaining powers. The buyer may strategically set a low initial project scope and high investment to incentivize renegotiation and vendor investment, which may explain why many IT outsourcing projects start small and allow expansions. Our findings also generate several testable predictions for IT outsourcing. This paper was accepted by Kartik Hosanagar, information systems. [ABSTRACT FROM AUTHOR]

We analyze the problem of a buyer who purchases a long-term project from one of several suppliers. A changing state of the world influences the costs of the suppliers. We distinguish between complete contracts conditioning on all future realizations of the state of the world and incomplete contracts renegotiated whenever the state of the world changes. We provide conditions such that incomplete contracting does not pose a problem. If the changing state of the world is publicly observable and the buyer cannot switch between suppliers during the lifetime of the project, the buyer achieves the same surplus irrespective of whether contracts are complete or incomplete. An English auction followed by renegotiation whenever the state of the world changes is optimal. To identify conditions when buyers should consider drafting complete contracts, we extend the analysis by considering private information about the changing state of the world and supplier switching. In both cases, incomplete contracting poses a problem. In a survey of procurement consultants, we confirm that publicly observable states of the world via price indexes play an important role in procurement. Moreover, the consultants confirm that supplier switching is infrequent in procurement practice. Thus, incomplete contracting is less of a problem in a considerable share of procurement projects. However, complete contracts are useful and could be used more often. This paper was accepted by Yan Chen, behavioral economics and decision analysis. [ABSTRACT FROM AUTHOR]

Software development outsourcing (SDO) contracts are plagued with ex post opportunism and underinvestment problems. Property rights theory (PRT) argues that appropriate property rights allocation between vendors and clients can reduce opportunism and incentivize relation-specific investments. We conduct an in-depth content analysis of 171 real SDO contracts and empirically examine how project attributes and contract parties’ bargaining power affect the allocation of intellectual property rights (IPR). We find that clients retained more IPR when software development was modularized whereas they shared more IPR with vendors in contracts that incorporated greater use of a vendor’s proprietary software. Greater levels of task complexity were associated with more IPR sharing with vendors. We also find that the responsiveness of IPR to project attributes varied across the different types of intellectual assets. For example, vendors were more likely to obtain redeployment rights of know-how if they were contracted for novel software development projects. However, clients were less likely to cede ownership of data and confidential information embedded in software customization projects. We control for a variety of firm and transaction characteristics and the results we obtain here are robust to concerns of endogeneity bias. [ABSTRACT FROM AUTHOR]

Total factor productivity represents a dimension of output that cannot be attributed to factors of production; it is unique to the firm, and central to its competitiveness. We posit that ownership structure plays a key role in productivity. However, ownership structure has an effect on productivity which changes with a firm’s age. Ownership structure that is optimal for new firms may not be optimal for older firms. We here consider the impact of ownership structure as defined by shares of individuals’ versus (broadly defined) institutional ownership. Our empirical counterpart draws on the UK company data for 2008-2017, obtained from the Orbis database. Our key explanatory variables are the joint share of the individual owners in equity and its square, but we also control concentration of ownership indices, along with a range of other firm-level characteristics. Applying fixed effects models along with instrumenting ownership with regional level variables, we found that new companies with majority individual owners and minority institutional owners outperform others. As firms age, however, these differences begin to disappear, with individual owners losing their control-related advantage. The results of the relative advantage of individual owners in the early stage is consistent with the property rights theory, which emphasises that residual control rights should remain with those whose investment is critical. It can be argued, however, that for whom the investment is critical changes as firm ages. Our managerial implications emphasise ownership competence in optimising ownership structure, which should evolve along the stages of the life-cycle of the firm.

Despite criticism in the wake of the GFC, history shows that theory and curricula adapt to rectify any disconnects between theory, curricula, and practice. Finance theory unquestionably has antecedents in economics, accounting, legal theory, and psychology. Some theoretical developments--including the moral hazard consequences of limited liability--have yet to filter through to many texts and curricula, which also omit explanations of uncertainty; incomplete and (sub)optimal contracting; contagion; and behavioural finance. Student learning outcomes could be enhanced if universities, perhaps in a final year, cross-disciplinary "capstone" course, empowered students to understand the financial documentation evidencing sophisticated transactions; map relevant cash flows and wealth transfers; and recognise Ponzi schemes, the ethics of stakeholder wealth transfers, the conditions for contagion, and incentives for adverse selection and moral hazard in practice. [ABSTRACT FROM AUTHOR]

Production in sweatshops entails an elevated risk of occupational injury and sickness due to accidents and exposure to dangerous working conditions. As most sweatshop locations lack basic social security systems, health problems have severe consequences for affected workers. Against this background, this article considers what obligations employers of sweatshop labor have to their workers, and how they should meet them. Based on core libertarian concepts, it shows that they are morally responsible for health problems caused by their management decisions, that they should compensate affected workers, and that they must prevent potentially irreversible health problems. In line with Nozick's contractarian method, the article further argues that these obligations should be implemented through a compulsory employment injury insurance system. Such a system would impose industry-wide health and safety standards, in contrast to the view that libertarianism excludes any labor regulation for the protection of workers, as an illegitimate interference in voluntary labor contracts. [ABSTRACT FROM AUTHOR]