Costly contingent contracts (original) (raw)
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LSE Research Online Documents on Economics, 2019
We develop novel methods for establishing coherency conditions in Static and Dynamic Limited Dependent Variables (LDV) Models. We propose estimation strategies based on Conditional Maximum Likelihood Estimation for simultaneous LDV models without imposing recursivity. Monte-Carlo experiments confirm substantive Mean-Squared-Error improvements of our approach over other estimators. We analyse the impact of financing constraints on innovation: ceteris paribus, a firm facing bindingfinance constraints is substantially less likely to undertake innovation, while the probability that a firm encounters a binding finance constraint more than doubles if the firm is innovative. A strong role for state dependence in dynamic versions of our models is also established.
Affiliation and Dependence in Economic Models
2009
Affiliation has been a prominent assumption in the study of economic models with statistical dependence. Despite its large number of applications, especially in auction theory, affiliation has limitations that are important to be aware of. This paper shows that affiliation is a restrictive condition and the intuition usually given for its adoption may be misleading. Also, other usual justifications for affiliation are not compelling. Moreover, some implications of affiliation do not generalize to other definitions of positive dependence. These results show the need to consider alternatives to affiliation. The results of this paper suggest new directions for the study of dependence in economics. The main result classifies economic models of information and proves the existence of a minimally informative random variable that makes types conditionally independent. If this variable is known, then all results that are valid under independence are also valid for these models with statistically dependent types. Complementing this result, we describe a method to study general forms of dependence using grid distributions. Grid distributions are distributions whose densities are constant in squares and they are dense in the set of all distributions. This method allows a comprehensive investigation on the revenue ranking of auctions under general dependence.
Optimal contracts when enforcement is a decision variable: A comment. Authors' reply
Econometrica, 2003
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. This paper analyzes choice-theoretic costly enforcement in an intertemporal contracting model with a differentially informed investor and entrepreneur. An intertemporal contract is modeled as a mechanism in which there is limited commitment to payment and enforcement decisions. The goal of the analysis is to characterize the effect of choice-theoretic costly enforcement on the structure of optimal contracts. The paper shows that simple debt is the optimal contract when commitment is limited and costly enforcement is a decision variable (Theorem 1). In contrast, stochastic contracts are optimal when agents can commit to the ex-ante optimal decisions (Theorem 2). The paper also shows that the costly state verification model can be viewed as a reduced form of an enforcement model in which agents choose payments and strategies as part of a perfect Bayesian Nash equilibrium.
Estimating Dynamic Limited Dependent Variable Models from Panel Data
We propose a simple two-step within-groups estimator for limited dependent variable models, which may include lags of the dependent variable, other endogenous explanatory variables, and unobservable individual e®ects. The models that we present are extensions of the random e®ects probit model of Chamberlain (1984), and have application in the analysis of binary choice, linear regression subject to censoring, and other models with endogenous selectivity. The estimator is based on reduced form predictions of the latent endogenous variables. We also show how to obtain, in one more step, chisquared test statistics of the overidentifying restrictions, and linear GMM estimators that are asymptotically e±cient. (JEL C23)
Modeling dependence in two-tier stochastic frontier models
Journal of Productivity Analysis, 2021
The two-tier stochastic frontier model has seen widespread application across a range of social science domains. It is particularly useful in examining bilateral exchanges where unobserved side-specific information exists on both sides of the transaction. These buyer and seller specific informational aspects offer opportunities to extract surplus from the other side of the market, in combination also with uneven relative bargaining power. Currently, this model is hindered by the fact that identification and estimation relies on the potentially restrictive assumption that these factors are statistically independent. We present three different models for empirical application that allow for varying degrees of dependence across these latent informational/bargaining factors.
Aggregate Consequences of Limited Contract Enforceability
Journal of Political Economy, 2004
We study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts. Because of enforceability problems, contracts are constrained efficient. We show that limited enforceability amplifies the impact of technological innovations on aggregate output. More generally, we show that lower enforceability of contracts will be associated with greater aggregate volatility. A key assumption for this result is that defaulting entrepreneurs are not excluded from the market.
Analysis of Panels and Limited Dependent Models
Journal of the American Statistical Association, 2000
Properties of alternative estimators of dynamic panel models: an empirical analysis of crosscountry data for the study of economic growth 136 Marc Nerlove Modified generalized instrumental variables estimation of panel data models with strictly exogenous instrumental variables
Equilibrium binding agreements: a comment
Journal of Economic Theory, 2004
To construct their Equilibrium Binding Agreements, Ray an Vohra [J. Econ. Theory, 73, 1997 ] define a concept of an equilibrium between coalitions. We show that this latter implicitely assumes that players, whithin each coalitions, use correlated strategies. We provide an example where such an equilibrium does not exist when players use uncorrelated strategies. * I thank Debraj Ray for useful comments.
Long-Term Relationships: Static Gains and Dynamic Inefficiencies
SSRN Electronic Journal, 2000
Do contractual frictions matter when …rms are engaged in repeated interactions? This paper argues that long-term relationships, which allow …rms to (partly) overcome the static costs associated with low contractibility, will under certain circumstances create dynamic ine¢ ciencies. We consider the repeated interaction between …nal good producers and intermediate input suppliers, where the provision of the intermediate input is noncontractible. A producer/supplier pair can be a good match or a bad match, with bad matches featuring lower productivity. This allows us to build a cooperative equilibrium where producers can switch suppliers and start cooperation immediately with new suppliers. Every period, one supplier has the opportunity to innovate, and in the baseline model, innovations are imitated after one period. We show that (i) innovations need to be larger to break up existing relationships in the cooperative equilibrium than in either a setup where the input is contractible or when we preclude cooperation in long-term relationships, (ii) the rate of innovation in the cooperative equilibrium is lower than in the contractible case, and may even be lower than in the non-cooperative equilibrium and (iii) cooperation may reduce welfare. Next, we assume that the frontier technology di¤uses slowly to suppliers (instead of after one period). In that case, for su¢ ciently slow di¤usion, the innovation rate in the cooperative equilibrium may be higher than even in the contractible case. Finally, we show that cooperation may also increase relationship speci…c innovations. JEL. C73,
Novel Approaches to Coherency Conditions in LDV Models
The paper discusses the major identi…cation issue of coherency conditions in LDV models with endogeneity and ‡exible temporal and contemporaneous correlations in the unobservables. Conditions for coherency as discussed in the existing literature are reviewed and shown to be rather esoteric. Two novel methods for establishing coherency conditions are presented, which have intuitive interpretations and are easy to implement and generalize. The constructive consequence of the new approaches is that they indicate how to achieve coherency in models traditionally classi…ed as incoherent through the use of prior sign restrictions on model parameters. This allows us to develop estimation strategies based on Conditional MLE for simultaneous LDV models without imposing recursivity. Econometric applications are used to illustrate the methods in practice and extensions are given to simultaneous ordered probit models with multiple regions.