Special Issue "Contract Theory"

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A special issue of Games (ISSN 2073-4336).

Deadline for manuscript submissions: closed (31 July 2013)

Special Issue Editor

Guest Editor
Dr. Tim Worrall (Website)

School of Economics, The University of Edinbergh, 31 Buccleuch Place, Edinburgh EH8 9JT, UK
Interests: game theory and bargaining theory; market structure and pricing; information and uncertainty; intertemporal choice and growth; consumption, saving, production, employment and investment; financial markets; corporate finance and governance; regulation and industrial policy

Special Issue Information

Dear Colleagues,

Contract Theory may be regarded as a subset of Game Theory where one agent can make a take-it-or-leave-it offer to the other parties in the game. Contract theory therefore, could be viewed as a refinement that characterises one, or a set of, constrained efficient equilibria. Contract Theory is useful in understanding relationships between trading partners, institutions and organisations when agents have conflicting objectives. It has become an essential component of understanding any exchange where trade is not simultaneous, for example, insurance or credit. Important topics for future research in contract theory include: financial contracting and its role in the credit crisis; the implications of enforcement constraints on contractual dynamics; the inclusion of behavioural elements in contracting and the interaction of formal and informal contracts; understanding the general equilibrium effects of contractual design. This special issue is intended to reflect the richness and variety of contract theory. Among the general topics of research to be considered are:
1) Relational contracts
2) Incomplete contracts
3) Limited enforcement
4) Financial and credit contracts

Dr. Tim Worrall
Guest Editor

Submission

Manuscripts should be submitted online at www.mdpi.com by registering and logging in to this website. Once you are registered, click here to go to the submission form. Manuscripts can be submitted until the deadline. Papers will be published continuously (as soon as accepted) and will be listed together on the special issue website. Research articles, review articles as well as communications are invited.

Submitted manuscripts should not have been published previously, nor be under consideration for publication elsewhere (except conference proceedings papers). All manuscripts are refereed through a peer-review process. A guide for authors and other relevant information for submission of manuscripts is available on the Instructions for Authors page. Games is an international peer-reviewed Open Access quarterly journal published by MDPI.

Please visit the Instructions for Authors page before submitting a manuscript. The Article Processing Charge (APC) for publication in this open access journal is 500 CHF (Swiss Francs). English correction and/or formatting fees will be charged in certain cases for those articles accepted for publication that require extensive additional formatting and/or English corrections. For further details see here.

Keywords

  • incomplete contracts
  • moral hazard
  • adverse selection
  • non-verifiability
  • limited commitment
  • reference points
  • relational contracts

Published Papers (6 papers)

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Research

Open AccessArticle The Optimality of Team Contracts
Games 2013, 4(4), 670-689; doi:10.3390/g4040670
Received: 11 April 2013 / Revised: 31 October 2013 / Accepted: 11 November 2013 / Published: 18 November 2013
Cited by 1 | PDF Full-text (484 KB) | HTML Full-text | XML Full-text
Abstract
This paper analyzes optimal contracts in a linear hidden-action model with normally distributed returns possessing two moments that are governed jointly by two agents who have negative exponential utilities. They can observe and verify each others’ effort levels and draft enforceable side-contracts [...] Read more.
This paper analyzes optimal contracts in a linear hidden-action model with normally distributed returns possessing two moments that are governed jointly by two agents who have negative exponential utilities. They can observe and verify each others’ effort levels and draft enforceable side-contracts on effort levels and realized returns. Standard constraints, resulting in incentive contracts, fail to ensure implementability, and we examine centralized collusion-proof contracts and decentralized team contracts, as well. We prove that the principal may restrict attention to team contracts whenever returns from the project satisfy a mild monotonicity condition. Full article
(This article belongs to the Special Issue Contract Theory)
Open AccessArticle Multidimensional Screening with Complementary Activities: Regulating a Monopolist with Unknown Cost and Unknown Preference for Empire Building
Games 2013, 4(3), 532-560; doi:10.3390/g4030532
Received: 14 August 2013 / Revised: 10 September 2013 / Accepted: 11 September 2013 / Published: 16 September 2013
PDF Full-text (352 KB) | HTML Full-text | XML Full-text
Abstract
We study the optimal regulation of a monopolist when intrinsic efficiency (intrinsic cost) and empire building tendency (marginal utility of output) are private information, but actual cost (the difference between intrinsic cost and effort level) is observable. This is a problem of [...] Read more.
We study the optimal regulation of a monopolist when intrinsic efficiency (intrinsic cost) and empire building tendency (marginal utility of output) are private information, but actual cost (the difference between intrinsic cost and effort level) is observable. This is a problem of multidimensional screening with complementary activities. Results are not only driven by the prior probabilities of the four possible types, but also by the relative magnitude of the uncertainty along the two dimensions of private information. If the marginal utility of output varies much more (less) across managers than the intrinsic marginal cost, there is empire building (efficiency) dominance. In that case, an inefficient empire builder produces more (less) and at lower (higher) marginal cost than an efficient money-seeker. It is only when variabilities are similar that there may be the natural ranking of activities (empire builders produce more, while efficient managers produce at a lower cost). Full article
(This article belongs to the Special Issue Contract Theory)
Open AccessArticle Solution Concepts of Principal-Agent Models with Unawareness of Actions
Games 2013, 4(3), 508-531; doi:10.3390/g4030508
Received: 14 February 2013 / Revised: 12 August 2013 / Accepted: 19 August 2013 / Published: 30 August 2013
Cited by 2 | PDF Full-text (302 KB) | HTML Full-text | XML Full-text
Abstract
In numerous economic scenarios, contracting parties may not have a clear picture of all the relevant aspects. A contracting party may be unaware of what she and/or others are entitled to determine. Therefore, she may reject a contract that is too good [...] Read more.
In numerous economic scenarios, contracting parties may not have a clear picture of all the relevant aspects. A contracting party may be unaware of what she and/or others are entitled to determine. Therefore, she may reject a contract that is too good to be true. Further, a contracting party may actively exert cognitive effort before signing a contract, so as to avoid being trapped into the contractual agreement ex post. In this paper, we propose a general framework to investigate these strategic interactions with unawareness, reasoning and cognition and intend to unify the solution concepts in the contracting context with unawareness. We build our conceptual framework upon the classical principal-agent relationship and compare the behaviors under various degrees of the unaware agent’s sophistication. Full article
(This article belongs to the Special Issue Contract Theory)
Open AccessArticle Contract and Game Theory: Basic Concepts for Settings with Finite Horizons
Games 2013, 4(3), 457-496; doi:10.3390/g4030457
Received: 7 April 2013 / Revised: 11 July 2013 / Accepted: 6 August 2013 / Published: 21 August 2013
Cited by 1 | PDF Full-text (839 KB) | HTML Full-text | XML Full-text
Abstract
This paper examines a general model of contract in multi-period settings with both external and self-enforcement. In the model, players alternately engage in contract negotiation and take individual actions. A notion of contractual equilibrium, which combines a bargaining solution and individual incentive [...] Read more.
This paper examines a general model of contract in multi-period settings with both external and self-enforcement. In the model, players alternately engage in contract negotiation and take individual actions. A notion of contractual equilibrium, which combines a bargaining solution and individual incentive constraints, is proposed and analyzed. The modeling framework helps identify the relation between the manner in which players negotiate and the outcome of the long-term contractual relationship. In particular, the model shows the importance of accounting for the self-enforced component of contract in the negotiation process. Examples and guidance for applications are provided, along with existence results and a result on a monotone relation between “activeness of contracting” and contractual equilibrium values. Full article
(This article belongs to the Special Issue Contract Theory)
Open AccessArticle Noncontractible Investments and Reference Points
Games 2013, 4(3), 437-456; doi:10.3390/g4030437
Received: 25 April 2013 / Revised: 27 June 2013 / Accepted: 2 August 2013 / Published: 14 August 2013
Cited by 2 | PDF Full-text (462 KB) | HTML Full-text | XML Full-text
Abstract
We analyze noncontractible investments in a model with shading. A seller can make an investment that affects a buyer’s value. The parties have outside options that depend on asset ownership. When shading is not possible and there is no contract renegotiation, an [...] Read more.
We analyze noncontractible investments in a model with shading. A seller can make an investment that affects a buyer’s value. The parties have outside options that depend on asset ownership. When shading is not possible and there is no contract renegotiation, an optimum can be achieved by giving the seller the right to make a take-it-or-leave-it offer. However, with shading, such a contract creates deadweight losses. We show that an optimal contract will limit the seller’s offers, and possibly create ex post inefficiency. Asset ownership can improve matters even if revelation mechanisms are allowed. Full article
(This article belongs to the Special Issue Contract Theory)
Open AccessArticle The Renegotiation-Proofness Principle and Costly Renegotiation
Games 2013, 4(3), 347-366; doi:10.3390/g4030347
Received: 7 April 2013 / Revised: 9 June 2013 / Accepted: 9 July 2013 / Published: 25 July 2013
Cited by 1 | PDF Full-text (494 KB) | HTML Full-text | XML Full-text
Abstract
We study contracting and costly renegotiation in settings of complete, but unverifiable information, using the mechanism-design approach. We show how renegotiation activity is best modeled in the fundamentals of the mechanism-design framework, so that noncontractibility of renegotiation amounts to a constraint on [...] Read more.
We study contracting and costly renegotiation in settings of complete, but unverifiable information, using the mechanism-design approach. We show how renegotiation activity is best modeled in the fundamentals of the mechanism-design framework, so that noncontractibility of renegotiation amounts to a constraint on the problem. We formalize and clarify the Renegotiation-Proofness Principle (RPP), which states that any state-contingent payoff vector that is implementable in an environment with renegotiation can also be implemented by a mechanism in which renegotiation does not occur in equilibrium. We observe that the RPP is not valid in some settings. However, we prove a general monotonicity result that confirms the RPP’s message about renegotiation opportunities having negative consequences. Our monotonicity theorem states that, as the costs of renegotiation increase, the set of implementable state-contingent payoffs becomes larger. Full article
(This article belongs to the Special Issue Contract Theory)

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