Incomplete contracts and the problem of social harm

We construct a model in which a first mover decides on its location before it knows the identity of the second mover; joint location results in a negative extemality. Contracts are inherently incomplete since the first mover's initial decision cannot be specified. We analyze several kinds of rights, including damages, injunctions, and rights to exclude (arising from covenants or land ownership). There are cases in which allocating any of these basic rights to the first mover-i.e., first-party rights-is dominated by second-party rights, and cases in which the reverse is true. A Coasian result (efficiency regardless of the rights allocation) only holds under a limited set of conditions. As corollaries of a theorem ranking the basic rights regimes, a number of results emerge contradicting conventional wisdom, including the relative inefficiency of concentrated land ownership and the relevance of the generator's identity. We conclude with a mechanism and a new rights regime that each yield the first best in all cases.

A fundamentális transzformáció és a referenciapont szerepe a hiányos szerződések elméletében (The role of basic transformation and reference point in the theory of incomplete contracts)

A cikk Oliver Hart és szerzőtársai modelljeinek következtetéseit hasonlítja össze Williamson tranzakciós költségekre vonatkozó nézeteivel. Megmutatja, hogy a két irányzat a vállalat vagy piac kérdéskörében más eszközöket használ, de hasonlóan érvel. Megismerkedhetünk Williamson Harttal szemben megfogalmazott azon kritikájával, hogy Hart modelljeiben az alkunak nincsenek tranzakciós költségei, illetve a kritika kritikájával is. Hart elképzeléseit támasztja alá a tulajdonjogi irányzaton belül nemrégiben kialakult referenciapont-elmélet, amely kísérleti lehetőségeket is nyújt a különböző feltételezések igazolására. ____ The article compares the conclusions from the models of Oliver Hart et al. with the views of Williamson on transaction costs. It shows that the two schools use different means on the question of the firm or the market, but similar reasoning. The author covers Williamson's criticism of Hart that there are no transaction costs in his models, and also the criticism of that criticism. Hart's notions are supported by the recently developed theory of reference point within the property-right trend, which offers chances of experimental proof of the various assumptions.

Exploring the dimensions and transactional outcomes of incomplete business contracts

With an increased emphasis on outsourcing and shortening business cycles, contracts between firms have become more important. Carefully written contracts contribute to the efficiency and longevity of inter-firm relationships as they may constrain opportunism and are often a less costly governance mechanism than maintaining complex social relationships (Larson 1992). This exploratory examination adds to our understanding of how incomplete contracts affect interorganizational exchange. First, we consider the multiple dimensions of contract constraints (safeguards). We also investigate the extent that constraints affect decisions to enforce the relationship by delaying payments, and whether the decision is efficient. Finally, we examine the extent the constraints are effective (and ineffective) at reducing transaction problems associated with enforcement. Based on 971 observations of transactions using explicit, written terms and other secondary data in the context of IT transaction in The Netherlands we test our research propositions.

Performance of incentive contracts in highway PPP projects in Brazil

Private-Public Partnerships (P.P.P.) is a new contractual model institutionalized in 2004 that could be used to remedy to the infrastructure deficit in Brazil. In a context of a principal and agent relation, the public partner goal is to give incentives to the private partner in the contract so that their interests are aligned. This qualitative research presents the findings of an empirical study examining the performance of incentive PPP contracts in Brazil in the highway sector. The goal is to explain how the contracting parties can align their interests in an environment of asymmetric information. Literature identified the factors that can influence PPP design and efficient incentive contracts. The study assesses the contribution of these factors in the building of PPP contracts by focusing on the case of the first and only PPP signed in the highway sector in Brazil which is the MG-050. The first step is to describe the condition of the highway network and the level of compliance of the private partner with the contract PPP MG-050. The second step is to explain the performance of the private partner and conclude if the interests of both partners were aligned in contractual aspects. On the basis of these findings and the analysis of the contract, the study formulates suggestions to improve the draft of PPP contracts from the perspective of the incentive theory of contracts.

A referenciapont-elmélet mint a hiányos információjú szerződések gondolatkörének új irányzata (The concept of ‘reference points’ as a new direction in the ‘incomplete contract’ theory)

A cikk az alig több mint öt éve született referenciapont-elméletet mutatja be, ismerteti és értékeli a témában eddig megjelent cikkeket és a nagyobb horderejű munkaanyagokat. A referenciapont-elmélet arra a kérdésre keresi a választ, hogy mi a vállalat optimális mérete, és mikor érdemesebb a termelési kooperációt nem a vállalaton belül, a különböző egységek koordinációjával megoldani, hanem külső vállalatok segítségével, a piacon keresztül megvalósítani. A referenciapont-elmélet az azonos kérdések megválaszolására törekvő hiányos szerződések elméletét ért kritika hatására született meg, és saját, újonnan megfogalmazott feltételrendszerét számos ponton ötvözi a hiányos szerződések hipotéziseivel, ugyanakkor bizonyításai során felhasználja a standard közgazdasági irányzat több eszközét is. A cikk a friss eredmények bemutatása mellett megkísérli előre becsülni a referenciapont-elmélet várható jövőbeli fejlődési irányait is. ____ The concept of reference points was established slightly more than five years ago, and it deals with the same boundary of firm related questions as the incomplete contract theory. The present review shows the most important journals and research papers in this field. Reference point theory arose out of a criticism of some of the elements of incomplete contract theory. Reference point theory combines newly- formulated hypotheses with some of the assumptions of incomplete contracts. The theory also uses some of the proving tools of standard economics. The author’s study not only shows the main results of the reference point theory, but it also tries to predict some possible future developments within the theory.

Government entity contribution to an effective partnership privatisation

The partnership form of privatisation is increasingly being used, in particular to carry out complex and evolving bundles of services. These have not previously been privatised because of incomplete contracts and contract management difficulties. Improved performance of the government entity as contract administrator and member of the partnership is crucial to modern service delivery expectations yet the privatisation literature has focused on other aspects of partnerships leaving the understanding of factors impacting the effectiveness of the government entity underdeveloped. This paper proposes the development of knowledge as to the range of factors which impact the effectiveness of the government entity. There is limited data available as to the operation of trust in the partnership relationship, and as to the capability of a range of privatisation forms to achieve stewardship of infrastructure. This research will utilise the findings from that research to build a tentative framework which will be utilised in staged research interrogating first the privatization literature and then the literature of other disciplines and sectors. The combined data will be analysed to provide government and practitioners such as government entity CEO’s with a complete listing of the operation of the factors which impact the effectiveness of the government entity in contributing to improved service delivery.

Essays on corporate governance, stakeholders, and restructuring

This dissertation consists of an introductory section and three theoretical essays analyzing the interaction of corporate governance and restructuring. The essays adopt an incomplete contracts approach and analyze the role of different institutional designs to facilitate the alignment of the objectives of shareholders and management (or employees) over the magnitude of corporate restructuring. The first essay analyzes how a firm's choice of production technology affects the employees' human capital investment. In the essay, the owners of the firm can choose between a specific and a general technology that both require a costly human capital investment by the employees. The specific technology is initially superior in using the human capital of employees but, in contrast to the general technology, it is not compatible with future innovations. As a result, anticipated changes in the specific technology diminish the ex ante incentives of the employees to invest in human capital unless the shareholders grant the employees specific governance mechanisms (a right of veto, severance pay) so as to protect their investments. The results of the first essay indicate that the level of protection that the shareholders are willing to offer falls short of the socially desirable one. Furthermore, when restructuring opportunities become more abundant, it becomes more attractive both socially and from the viewpoint of the shareholders to initially adopt the general technology. The second essay analyzes how the allocation of authority within the firm interacts with the owners' choice of business strategy when the ability of the owners to monitor the project proposals of the management is biased in favor of the status quo strategy. The essay shows that a bias in the monitoring ability will affect not only the allocation of authority within the firm but also the choice of business strategy. Especially, when delegation has positive managerial incentive effects, delegation turns out to be more attractive under the new business strategy because the improved managerial incentives are a way for the owners to compensate their own reduced information gathering ability. This effect, however, simultaneously makes the owners hesitant to switch the strategy since it would involve a more frequent loss of control over the project choice. Consequently, the owners' lack of knowledge of the new business strategy may lead to a suboptimal choice of strategy. The third essay analyzes the implications of CEO succession process for the ideal board structure. In this essay, the presence of the departing CEO on the board facilitates the ability of the board to find a matching successor and to counsel him. However, the ex-CEO's presence may simultaneously also weaken the ability of the board to restructure since the predecessor may use the opportunity to distort the successor's project choice. The results of the essay suggest that the extent of restructuring gains, the firm's ability to hire good outside directors and the importance of board's advisory role affect at which point and for how long the shareholders may want to nominate the predecessor to the board.

Contrato incompleto

A tese objetiva construir, sob o ponto de vista dogmático, critérios para a caracterização do contrato incompleto no direito brasileiro, estabelecendo o traço distintivo de sua causa e a disciplina jurídica que lhe é aplicável, à luz da metodologia civil-constitucional. Pretende-se, ainda, na perspectiva funcional dos fatos jurídicos, que permite a qualificação do contrato incompleto como negócio jurídico que emprega a técnica da gestão negativa da álea normal dos contratos, definir parâmetros interpretativos que orientem a sua execução. Por representarem o esmorecimento voluntário da técnica regulamentar, os contratos incompletos exigem elevados padrões de cooperação entre os contratantes na integração das lacunas, a ensejar a incidência reforçada dos princípios da boa-fé objetiva, da função social e do equilíbrio contratual, relativamente aos contratos em que ocorre a gestão positiva da álea normal. Após investigar os mecanismos legais incidentes na hipótese de inadimplemento do dever de integração da lacuna, analisam-se os limites legais e valorativos a que se sujeitam os contratos incompletos. Em chave conclusiva, almeja-se estabelecer o contrato incompleto como negócio jurídico lícito e merecedor de tutela no atendimento aos interesses concretos dos particulares no exercício de suas atividades econômicas, a evidenciar os novos confins da autonomia privada na legalidade constitucional.

Loan sales under asymmetric information

Loans are illiquid assets that can be sold in a secondary market even that buyers have no certainty about their quality. I study a model in which a lender has access to new investment opportunities when all her assets are illiquid. To raise funds, the lender may either borrow using her assets as collateral, or she can sell them in a secondary market. Given asymmetric information about assets quality, the lender cannot recover the total value of her assets. There is then a role for the government to correct the information problem using fiscal tools.

Partial decentralization as a safeguard against favoritism

In this paper I investigate the optimal level of decentralization of tasks for the provision of a local public good. I enrich the well-known trade-off between internalization of spillovers (that favors centralization) and accountability (that favors decentralization) by considering that public goods are produced through multiple tasks. This adds an additional institutional setting, partial decentralization, to the classical choice between full decentralization and full centralization. The main results are that partial decentralization is optimal when both the variance of exogenous shocks to electorate’s utility is large and the electorate expects high performance from politicians. I also show that the optimal institutional setting depends on the degree of substitutability / complementarity between tasks. In particular, I show that a large degree of substitutability between tasks makes favoritism more likely, which increases the desirability of partial decentralization as a safeguard against favoritism.

Mecanismos de solución de controversias en la contratación derivada de contratos financiados con recursos del Banco Mundial

Esta tesis se ocupa de analizar la eficacia de la cláusula de solución de controversias contractuales dispuesta en la contratación estatal que es financiada con recursos del Banco Mundial –regla de excepción a la aplicación del Estatuto General de Contratación Pública– pues en las normas de contratación de dicho organismo, se ha previsto que ante un conflicto contractual corresponde a un conciliador (versión 2008 de las normas Banco Mundial) o a un mediador (versión 2013) “tomar una decisión” para resolver la controversia con fuerza vinculante para las partes. La reflexión aborda el papel del “conciliador” o “mediador” según las facultades que le atribuyen las normas del Banco Mundial y su distinción respecto al concepto legal que prevé el ordenamiento nacional, donde el conciliador o mediador no toman decisiones y en consecuencia no es clara la forma de acudir a estas figuras. El reto nos lleva a considerar dos alternativas de aplicación de la cláusula para hacerla eficaz: el primero, considerar a la mediación como una figura autónoma regulada en el contrato por autorización de nuestro Estatuto de Contratación Estatal y de los Convenios suscritos con organismos internacionales, a partir de la cual se reconozca la producción de los efectos indicados por el Banco Mundial en cabeza del mediador; en segundo lugar y para desatar el efecto útil de la cláusula, considerar a la mediación como figura análoga a la amigable composición, y tramitar la solución de controversias bajo esta figura.

A note on the property rights theory and the ex ante value of information

This paper examines the ex ante value of information in the property rights model where the possibility exists that an investing agent can be provided with relevant information before investments are undertaken. When contracts are incomplete, from an ex ante perspective, informing the investing agent does not necessarily increase the expected surplus resulting from a relationship between two economic agents. The paper highlights the fact that the second-best nature of the problem that arises from contractual incompleteness can ensure this.

Distant relations : limits to relational contracting in domestic violence programmes

Purpose – The purpose of this paper is to assess the applicability of relational contract theory in situations where government departments contract with non-government welfare organisations to deliver human service programmes. Its limits are highlighted by an assessment of programmes for domestically violent men that epitomise “management of incomplete contracts” central to the theory.

Design/methodology/approach – The paper is based on an evaluation of contracted-out programmes for perpetrators of domestic violence in Australia that set out to compare and contrast distinct models of service delivery by documenting programme logic, service delivery effectiveness and effects on programme participants. It reflects on the difficulties of monitoring such programmes and considers the implications of this for contracting theory and for human service practice.

Findings – In contrast to critiques of contracting-out in a neo-liberal environment that emphasise how accountability and reporting requirements limit the autonomy of contracted agencies, this paper highlights considerable variation in how programmes were managed and delivered despite standardised service delivery contracts developed by the government department funding the programmes. This leads to a consideration of “incomplete contracts” where service delivery outcomes are hard to measure or there is limited knowledge of the contracted agencies by the contracting government department.

Originality/value – The paper highlights a situation in which the recommendations of relational contracting theory can exacerbate the difficulties of quality assurance rather than minimise them. It then argues a need for workforce development in the government departments and the contracted agencies, to enable a nuanced monitoring of the programmes' service delivery and promotion of quality assurance processes.

Avaliação da estrutura de propriedade de unidades prisionais sob a ótica de contratos incompletos

A motivação desta dissertação é responder a seguinte pergunta: qual a melhor estrutura de propriedade, pública ou privada, para a prestação do serviço de administração de unidades prisionais? Para responder a pergunta será considerada a impossibilidade de formular um Contrato Completo para a prestação do serviço e os incentivos conflitantes dos agentes envolvidos. O desenvolvimento do tema será realizado mediante a construção de um modelo funcional da rotina da unidade prisional que abordará os conceitos de competição, assimetria de informação, comportamento oportunista e influência eleitoral.

Desenho de um sistema de metas sociais

Este trabalho discute a racionalidade econômica para o desenvolvimento de um sistema de metas sociais como forma de o governo federal aumentar a eficiência na utilização dos recursos sociais transferidos para os municípios. O trabalho desenvolve algumas extensões do modelo de agente-principal incluindo abordagens estáticas com e sem informação imperfeita e abordagens dinâmicas com contratos perfeitos e imperfeitos. Os resultados dos modelos estáticos indicam que o uso de critérios usuais de focalização onde localidades mais pobres recebem mais recursos pode levar a incentivos adversos para a erradicação da pobreza. Nós também mostramos que transferências incondicionais do governo federal deslocam gastos sociais locais. O trabalho argumenta em favor do uso de contratos onde quanto maior for a melhora no indicador social escolhido, mais recursos o município receberia. A introdução de informação imperfeita neste modelo basicamente gera uma penalidade aos segmentos pobres de áreas onde os governos demonstram ser menos avessos a pobreza. O trabalho também aborda o problema de favoritismo político onde determinados grupos sociais têm maior, ou menor, atenção por parte de governos locais. O resultado é que as políticas sociais acabam privilegiando determinados setores em detrimento de outros. Com o estabelecimento de metas sociais é possível, se não eliminar o problema, ao menos criar incentivos corretos para que os gastos sociais sejam distribuídos de forma mais equânime. Também desenvolvemos modelos dinâmicos com diferentes possibilidades de renegociação ao longo do tempo. Demonstramos que a melhor forma de aumentar a eficiência alocativa dos fundos seria criar mecanismos institucionais garantindo a impossibilidade de renegociações bilaterais. Esse contrato ótimo reproduz a seqüência de metas e transferências de vários períodos encontrada na solução do modelo estático. Entretanto, esse resultado- desaparece quando incorporamos contratos incompletos. Nesse caso, as ineficiências ex-ante criadas pela possibilidade de renegociação devem ser comparadas com as ineficiências ex-post criadas por não se usar a informação nova revelada ao longo do processo. Finalmente, introduzimos a possibilidade do resultado social observado depender não só do investimento realizado, mas também da presença de choques. Nesse caso, tanto o governo quanto o município aumentam as suas metas de investimento na área social. Contratos lineares na presença de choques negativos fazem com que os municípios recebem menos recursos justamente em situações adversas. Para contornar esse problema, mostramos a importância da utilização de contratos com comparação de performance.