Less Risk, More Effort : Demand Risk Allocation in Incomplete Contracts

This article investigates the allocation of demand risk within an incomplete contract framework. We consider an incomplete contractual relationship between a public authority and a private provider (i.e. a public-private partnership), in which the latter invests in non-verifiable cost-reducing efforts and the former invests in non-verifiable adaptation efforts to respond to changing consumer demand over time. We show that the party that bears the demand risk has fewer hold-up opportunities and that this leads the other contracting party to make more effort. Thus, in our model, bearing less risk can lead to more effort, which we describe as a new example of âeuro~counter-incentivesâeuro?. We further show that when the benefits of adaptation are important, it is socially preferable to design a contract in which the demand risk remains with the private provider, whereas when the benefits of cost-reducing efforts are important, it is socially preferable to place the demand risk on the public authority. We then apply these results to explain two well-known case studies.

Three essays in incomplete contracts

General Introduction These three chapters, while fairly independent from each other, study economic situations in incomplete contract settings. They are the product of both the academic freedom my advisors granted me, and in this sense reflect my personal interests, and of their interested feedback. The content of each chapter can be summarized as follows: Chapter 1: Inefficient durable-goods monopolies In this chapter we study the efficiency of an infinite-horizon durable-goods monopoly model with a fmite number of buyers. We find that, while all pure-strategy Markov Perfect Equilibria (MPE) are efficient, there also exist previously unstudied inefficient MPE where high valuation buyers randomize their purchase decision while trying to benefit from low prices which are offered once a critical mass has purchased. Real time delay, an unusual monopoly distortion, is the result of this attrition behavior. We conclude that neither technological constraints nor concern for reputation are necessary to explain inefficiency in monopolized durable-goods markets. Chapter 2: Downstream mergers and producer's capacity choice: why bake a larger pie when getting a smaller slice? In this chapter we study the effect of downstream horizontal mergers on the upstream producer's capacity choice. Contrary to conventional wisdom, we find anon-monotonic relationship: horizontal mergers induce a higher upstream capacity if the cost of capacity is low, and a lower upstream capacity if this cost is high. We explain this result by decomposing the total effect into two competing effects: a change in hold-up and a change in bargaining erosion. Chapter 3: Contract bargaining with multiple agents In this chapter we study a bargaining game between a principal and N agents when the utility of each agent depends on all agents' trades with the principal. We show, using the Potential, that equilibria payoffs coincide with the Shapley value of the underlying coalitional game with an appropriately defined characteristic function, which under common assumptions coincides with the principal's equilibrium profit in the offer game. Since the problem accounts for differences in information and agents' conjectures, the outcome can be either efficient (e.g. public contracting) or inefficient (e.g. passive beliefs).

Un partenariat public-privé rigide ou flexible ? Théorie et application aux concessions routières à péage

In this article, we explore the contractual design of toll road concession contracts. We highlight the fact that contracting parties try to sign not only complete rigid contracts in order to avoid renegotiations but also flexible contracts in order to adapt contractual framework to contingencies and to create incentives for cooperative behavior. This gives rise to multiple toll adjustment provisions and to a tradeoff between rigid and flexible contracts. Such a tradeoff is formalized using an incomplete contract framework - including ex post maladaptation and renegotiation costs - and propositions are tested using an original database of 71 concession contracts. Our results suggest an important role for economic efficiency concerns, as well as politics, in designing such public-private contracts. Codes JEL : D23, H11, H54, L14, L9.

Financial Markets and Real Ecinomy: Four Essays in International Trade

Financial markets play an important role in an economy performing various functions like mobilizing and pooling savings, producing information about investment opportunities, screening and monitoring investments, implementation of corporate governance, diversification and management of risk. These functions influence saving rates, investment decisions, technological innovation and, therefore, have important implications for welfare. In my PhD dissertation I examine the interplay of financial and product markets by looking at different channels through which financial markets may influence an economy.My dissertation consists of four chapters. The first chapter is a co-authored work with Martin Strieborny, a PhD student from the University of Lausanne. The second chapter is a co-authored work with Melise Jaud, a PhD student from the Paris School of Economics. The third chapter is co-authored with both Melise Jaud and Martin Strieborny. The last chapter of my PhD dissertation is a single author paper.Chapter 1 of my PhD thesis analyzes the effect of financial development on growth of contract intensive industries. These industries intensively use intermediate inputs that neither can be sold on organized exchange, nor are reference-priced (Levchenko, 2007; Nunn, 2007). A typical example of a contract intensive industry would be an industry where an upstream supplier has to make investments in order to customize a product for needs of a downstream buyer. After the investment is made and the product is adjusted, the buyer may refuse to meet a commitment and trigger ex post renegotiation. Since the product is customized to the buyer's needs, the supplier cannot sell the product to a different buyer at the original price. This is referred in the literature as the holdup problem. As a consequence, the individually rational suppliers will underinvest into relationship-specific assets, hurting the downstream firms with negative consequences for aggregate growth. The standard way to mitigate the hold up problem is to write a binding contract and to rely on the legal enforcement by the state. However, even the most effective contract enforcement might fail to protect the supplier in tough times when the buyer lacks a reliable source of external financing. This suggests the potential role of financial intermediaries, banks in particular, in mitigating the incomplete contract problem. First, financial products like letters of credit and letters of guarantee can substantially decrease a risk and transaction costs of parties. Second, a bank loan can serve as a signal about a buyer's true financial situation, an upstream firm will be more willing undertake relationship-specific investment knowing that the business partner is creditworthy and will abstain from myopic behavior (Fama, 1985; von Thadden, 1995). Therefore, a well-developed financial (especially banking) system should disproportionately benefit contract intensive industries.The empirical test confirms this hypothesis. Indeed, contract intensive industries seem to grow faster in countries with a well developed financial system. Furthermore, this effect comes from a more developed banking sector rather than from a deeper stock market. These results are reaffirmed examining the effect of US bank deregulation on the growth of contract intensive industries in different states. Beyond an overall pro-growth effect, the bank deregulation seems to disproportionately benefit the industries requiring relationship-specific investments from their suppliers.Chapter 2 of my PhD focuses on the role of the financial sector in promoting exports of developing countries. In particular, it investigates how credit constraints affect the ability of firms operating in agri-food sectors of developing countries to keep exporting to foreign markets.Trade in high-value agri-food products from developing countries has expanded enormously over the last two decades offering opportunities for development. However, trade in agri-food is governed by a growing array of standards. Sanitary and Phytosanitary standards (SPS) and technical regulations impose additional sunk, fixed and operating costs along the firms' export life. Such costs may be detrimental to firms' survival, "pricing out" producers that cannot comply. The existence of these costs suggests a potential role of credit constraints in shaping the duration of trade relationships on foreign markets. A well-developed financial system provides the funds to exporters necessary to adjust production processes in order to meet quality and quantity requirements in foreign markets and to maintain long-standing trade relationships. The products with higher needs for financing should benefit the most from a well functioning financial system. This differential effect calls for a difference-in-difference approach initially proposed by Rajan and Zingales (1998). As a proxy for demand for financing of agri-food products, the sanitary risk index developed by Jaud et al. (2009) is used. The empirical literature on standards and norms show high costs of compliance, both variable and fixed, for high-value food products (Garcia-Martinez and Poole, 2004; Maskus et al., 2005). The sanitary risk index reflects the propensity of products to fail health and safety controls on the European Union (EU) market. Given the high costs of compliance, the sanitary risk index captures the demand for external financing to comply with such regulations.The prediction is empirically tested examining the export survival of different agri-food products from firms operating in Ghana, Mali, Malawi, Senegal and Tanzania. The results suggest that agri-food products that require more financing to keep up with food safety regulation of the destination market, indeed sustain longer in foreign market, when they are exported from countries with better developed financial markets.Chapter 3 analyzes the link between financial markets and efficiency of resource allocation in an economy. Producing and exporting products inconsistent with a country's factor endowments constitutes a serious misallocation of funds, which undermines competitiveness of the economy and inhibits its long term growth. In this chapter, inefficient exporting patterns are analyzed through the lens of the agency theories from the corporate finance literature. Managers may pursue projects with negative net present values because their perquisites or even their job might depend on them. Exporting activities are particularly prone to this problem. Business related to foreign markets involves both high levels of additional spending and strong incentives for managers to overinvest. Rational managers might have incentives to push for exports that use country's scarce factors which is suboptimal from a social point of view. Export subsidies might further skew the incentives towards inefficient exporting. Management can divert the export subsidies into investments promoting inefficient exporting.Corporate finance literature stresses the disciplining role of outside debt in counteracting the internal pressures to divert such "free cash flow" into unprofitable investments. Managers can lose both their reputation and the control of "their" firm if the unpaid external debt triggers a bankruptcy procedure. The threat of possible failure to satisfy debt service payments pushes the managers toward an efficient use of available resources (Jensen, 1986; Stulz, 1990; Hart and Moore, 1995). The main sources of debt financing in the most countries are banks. The disciplining role of banks might be especially important in the countries suffering from insufficient judicial quality. Banks, in pursuing their rights, rely on comparatively simple legal interventions that can be implemented even by mediocre courts. In addition to their disciplining role, banks can promote efficient exporting patterns in a more direct way by relaxing credit constraints of producers, through screening, identifying and investing in the most profitable investment projects. Therefore, a well-developed domestic financial system, and particular banking system, would help to push a country's exports towards products congruent with its comparative advantage.This prediction is tested looking at the survival of different product categories exported to US market. Products are identified according to the Euclidian distance between their revealed factor intensity and the country's factor endowments. The results suggest that products suffering from a comparative disadvantage (labour-intensive products from capital-abundant countries) survive less on the competitive US market. This pattern is stronger if the exporting country has a well-developed banking system. Thus, a strong banking sector promotes exports consistent with a country comparative advantage.Chapter 4 of my PhD thesis further examines the role of financial markets in fostering efficient resource allocation in an economy. In particular, the allocative efficiency hypothesis is investigated in the context of equity market liberalization.Many empirical studies document a positive and significant effect of financial liberalization on growth (Levchenko et al. 2009; Quinn and Toyoda 2009; Bekaert et al., 2005). However, the decrease in the cost of capital and the associated growth in investment appears rather modest in comparison to the large GDP growth effect (Bekaert and Harvey, 2005; Henry, 2000, 2003). Therefore, financial liberalization may have a positive impact on growth through its effect on the allocation of funds across firms and sectors.Free access to international capital markets allows the largest and most profitable domestic firms to borrow funds in foreign markets (Rajan and Zingales, 2003). As domestic banks loose some of their best clients, they reoptimize their lending practices seeking new clients among small and younger industrial firms. These firms are likely to be more risky than large and established companies. Screening of customers becomes prevalent as the return to screening rises. Banks, ceteris paribus, tend to focus on firms operating in comparative-advantage sectors because they are better risks. Firms in comparative-disadvantage sectors finding it harder to finance their entry into or survival in export markets either exit or refrain from entering export markets. On aggregate, one should therefore expect to see less entry, more exit, and shorter survival on export markets in those sectors after financial liberalization.The paper investigates the effect of financial liberalization on a country's export pattern by comparing the dynamics of entry and exit of different products in a country export portfolio before and after financial liberalization.The results suggest that products that lie far from the country's comparative advantage set tend to disappear relatively faster from the country's export portfolio following the liberalization of financial markets. In other words, financial liberalization tends to rebalance the composition of a country's export portfolio towards the products that intensively use the economy's abundant factors.

Are Public Private Partnerships that Rigid ? And Why ? : Evidence from Toll Road Concession Contracts

Transport concession contracts are commonly said to be standardized and too rigid. They would not allow public authorities to adapt them to evolving context and circumstances. This paper aims at challenging this view and, more particularly, the view that contractual rigidity for transport concessions is exogenous. Using a transaction cost framework, we disentangle between three main determinants of contractual rigidity: traffic uncertainty; connivance between contracting parties; quality of the institutional environment. Using an original database of toll road concession contracts, we observe a great variety of provisions for toll adjustment. We find that these exogenous determinants significantly influence contractual choices.

Complication of carotid stenting: incomplete misdeployment of the stent in the femoral artery.

OBJECTIVES: The presence of intravascular foreign bodies is underreported in the literature and is more commonly encountered in clinical practice. We report on a case where an attempt to position a carotid stent resulted in misdeployment of the stent in the femoral artery and its surgical removal. METHODS: A 63-year-old patient admitted to hospital for cerebral stroke underwent thrombolysis for occlusive dissection of right carotid artery and was transferred to our hospital for additional thrombo-aspiration and carotid stenting. RESULTS: The carotid stent was misdeployed incompletely in the femoral artery and had to be removed surgically. CONCLUSIONS: Appropriate knowledge of intravascular migration and deployment failure management should be considered as important as the optimal device deployment.

Myocarditis and coronary dilatation in the 1st week of life: neonatal incomplete Kawasaki disease?

Acute heart failure in the early neonatal period is rare. Normally it is due to asphyxia, severe septicaemia, a congenital heart malformation or a viral myocarditis. Kawasaki disease (KD) as a cause of an neonatal myocarditis is not an established diagnosis. KD is a vasculitis of still unknown origin occurring predominantly in infants and preschool children. KD before the age of 3 months is rare. There are only few reports about KD in the 1st month. We present a newborn who showed the cardiac symptoms of KD in the 1st week of life with coronary dilatation and myocarditis. CONCLUSION: The diagnosis of incomplete KD should be considered not only in infants but also in newborns with signs of myocarditis and coronary abnormalities. Therapy with gammaglobulins may prevent the sequelae of coronary involvement.

Incomplete excision of basal cell carcinoma in the subunits of the nose.

Reconstructive procedures after resection of nasal basal cell carcinoma (BCC) vary depending on the subunit involved. The aim of the present study was to assess the influence of the location of the BCC on the rate of incomplete excisions, so we made a retrospective analysis of all nasal BCC excised at our hospital between 2002 and 2005. The incomplete excision rate was 24/148 (16%). More incomplete excision occurred on the alae (n=13) when compared to the dorsum (n=2) of the nose (p<0.05). Eight two-staged procedures resulted in incomplete resection, whereas 9 (6%) frozen section analyses were false-negative. BCC were most likely to be incompletely excised on the nasal tip and alae, and both subunits required more elaborate reconstructions. This, however, was not the result of poor estimation of the extent of the tumour and reluctance to excise more challenging areas widely for reconstruction, but to the method chosen to eradicate the tumour.

New electrocardiographic criteria for discriminating between Brugada types 2 and 3 patterns and incomplete right bundle branch block.

OBJECTIVES: The aim of this study was to evaluate new electrocardiographic (ECG) criteria for discriminating between incomplete right bundle branch block (RBBB) and the Brugada types 2 and 3 ECG patterns. BACKGROUND: Brugada syndrome can manifest as either type 2 or type 3 pattern. The latter should be distinguished from incomplete RBBB, present in 3% of the population. METHODS: Thirty-eight patients with either type 2 or type 3 Brugada pattern that were referred for an antiarrhythmic drug challenge (AAD) were included. Before AAD, 2 angles were measured from ECG leads V(1) and/or V(2) showing incomplete RBBB: 1) α, the angle between a vertical line and the downslope of the r'-wave, and 2) β, the angle between the upslope of the S-wave and the downslope of the r'-wave. Baseline angle values, alone or combined with QRS duration, were compared between patients with negative and positive results on AAD. Receiver-operating characteristic curves were constructed to identify optimal discriminative cutoff values. RESULTS: The mean β angle was significantly smaller in the 14 patients with negative results on AAD compared to the 24 patients with positive results on AAD (36 ± 20° vs. 62 ± 20°, p < 0.01). Its optimal cutoff value was 58°, which yielded a positive predictive value of 73% and a negative predictive value of 87% for conversion to type 1 pattern on AAD; α was slightly less sensitive and specific compared with β. When the angles were combined with QRS duration, it tended to improve discrimination. CONCLUSIONS: In patients with suspected Brugada syndrome, simple ECG criteria can enable discrimination between incomplete RBBB and types 2 and 3 Brugada patterns.

Quantitative sequence analysis of FBN1 premature termination codons provides evidence for incomplete NMD in leukocytes.

We improved, evaluated, and used Sanger sequencing for quantification of single nucleotide polymorphism (SNP) variants in transcripts and gDNA samples. This improved assay resulted in highly reproducible relative allele frequencies (e.g., for a heterozygous gDNA 50.0+/-1.4%, and for a missense mutation-bearing transcript 46.9+/-3.7%) with a lower detection limit of 3-9%. It provided excellent accuracy and linear correlation between expected and observed relative allele frequencies. This sequencing assay, which can also be used for the quantification of copy number variations (CNVs), methylations, mosaicisms, and DNA pools, enabled us to analyze transcripts of the FBN1 gene in fibroblasts and blood samples of patients with suspected Marfan syndrome not only qualitatively but also quantitatively. We report a total of 18 novel and 19 known FBN1 sequence variants leading to a premature termination codon (PTC), 26 of which we analyzed by quantitative sequencing both at gDNA and cDNA levels. The relative amounts of PTC-containing FBN1 transcripts in fresh and PAXgene-stabilized blood samples were significantly higher (33.0+/-3.9% to 80.0+/-7.2%) than those detected in affected fibroblasts with inhibition of nonsense-mediated mRNA decay (NMD) (11.0+/-2.1% to 25.0+/-1.8%), whereas in fibroblasts without NMD inhibition no mutant alleles could be detected. These results provide evidence for incomplete NMD in leukocytes and have particular importance for RNA-based analyses not only in FBN1 but also in other genes.

CNOT3 is a modifier of PRPF31 mutations in retinitis pigmentosa with incomplete penetrance.

Heterozygous mutations in the PRPF31 gene cause autosomal dominant retinitis pigmentosa (adRP), a hereditary disorder leading to progressive blindness. In some cases, such mutations display incomplete penetrance, implying that certain carriers develop retinal degeneration while others have no symptoms at all. Asymptomatic carriers are protected from the disease by a higher than average expression of the PRPF31 allele that is not mutated, mainly through the action of an unknown modifier gene mapping to chromosome 19q13.4. We investigated a large family with adRP segregating an 11-bp deletion in PRPF31. The analysis of cell lines derived from asymptomatic and affected individuals revealed that the expression of only one gene among a number of candidates within the 19q13.4 interval significantly correlated with that of PRPF31, both at the mRNA and protein levels, and according to an inverse relationship. This gene was CNOT3, encoding a subunit of the Ccr4-not transcription complex. In cultured cells, siRNA-mediated silencing of CNOT3 provoked an increase in PRPF31 expression, confirming a repressive nature of CNOT3 on PRPF31. Furthermore, chromatin immunoprecipitation revealed that CNOT3 directly binds to a specific PRPF31 promoter sequence, while next-generation sequencing of the CNOT3 genomic region indicated that its variable expression is associated with a common intronic SNP. In conclusion, we identify CNOT3 as the main modifier gene determining penetrance of PRPF31 mutations, via a mechanism of transcriptional repression. In asymptomatic carriers CNOT3 is expressed at low levels, allowing higher amounts of wild-type PRPF31 transcripts to be produced and preventing manifestation of retinal degeneration.

PyRate: a new program to estimate speciation and extinction rates from incomplete fossil data

Despite the advancement of phylogenetic methods to estimate speciation and extinction rates, their power can be limited under variable rates, in particular for clades with high extinction rates and small number of extant species. Fossil data can provide a powerful alternative source of information to investigate diversification processes. Here, we present PyRate, a computer program to estimate speciation and extinction rates and their temporal dynamics from fossil occurrence data. The rates are inferred in a Bayesian framework and are comparable to those estimated from phylogenetic trees. We describe how PyRate can be used to explore different models of diversification. In addition to the diversification rates, it provides estimates of the parameters of the preservation process (fossilization and sampling) and the times of speciation and extinction of each species in the data set. Moreover, we develop a new birth-death model to correlate the variation of speciation/extinction rates with changes of a continuous trait. Finally, we demonstrate the use of Bayes factors for model selection and show how the posterior estimates of a PyRate analysis can be used to generate calibration densities for Bayesian molecular clock analysis. PyRate is an open-source command-line Python program available at http://sourceforge.net/projects/pyrate/.