Completing contracts ex post: How car manufacturers manage car dealers

This article illustrates how contracts are completed ex post in practice and, in so doing, indirectly suggests what the real function of contracts may be. Our evidence comes from the contracts between automobile manufacturers and their dealers in 23 dealership networks in Spain. Franchising dominates automobile distribution because of the need to decentralize pricing and control of service decisions. It motivates local managers to undertake these activities at minimum cost for the manufacturer. However, it creates incentive conflicts, both between manufacturers and dealers and among dealers themselves, concerning the level of sales and service provided. It also holds potential for expropriation of specific investments. Contracts deal with these conflicts by restricting dealers decision rights and granting manufacturers extensive completion, monitoring and enforcement powers. The main mechanism that may prevent abuse of these powers is the manufacturers reputational capital.

Employment consequences of restrictive permanent contracts: Evidence from Spanish labor market reforms

Temporary employment contracts allowing unrestricted dismissals wereintroduced in Spain in 1984 and quickly came to account for most new jobs.As a result, temporary employment increased from around 10% in themid-eighties to more than 30% in the early nineties. In 1997, however,the Spanish government attempted to reduce the incidence of temporaryemployment by reducing payroll taxes and dismissal costs for permanentcontracts. In this paper, we use individual data from the Spanish LaborForce Survey to estimate the effects of reduced payroll taxes anddismissal costs on the distribution of employment and worker flows. Weexploit the fact that recent reforms apply only to certain demographicgroups to set up a natural experiment research design that can be usedto study the effects of contract regulations. Our results show that thereduction of payroll taxes and dismissal costs increased the employmentof young workers on permanent contracts, although the effects for youngwomen are not always significant. Results for older workers showinsignificant effects. The results suggest a moderately elastic responseof permanent employment to non-wage labor costs for young men. We alsofind positive effects on the transitions from unemployment and temporaryemployment into permanent employment for young and older workers, althoughthe effects for older workers are not always significant. On the otherhand, transitions from permanent employment to non-employment increasedonly for older men, suggesting that the reform had little effect ondismissals.

Recursive contracts

We obtain a recursive formulation for a general class of contractingproblems involving incentive constraints. Under these constraints,the corresponding maximization (sup) problems fails to have arecursive solution. Our approach consists of studying the Lagrangian.We show that, under standard assumptions, the solution to theLagrangian is characterized by a recursive saddle point (infsup)functional equation, analogous to Bellman's equation. Our approachapplies to a large class of contractual problems. As examples, westudy the optimal policy in a model with intertemporal participationconstraints (which arise in models of default) and intertemporalcompetitive constraints (which arise in Ramsey equilibria).

Fixed-term contracts and the duration distribution of unemployment

In the mid-1980s, many European countries introduced fixed-term contracts.Since then their labor markets have become more dynamic. This paper studiesthe implications of such reforms for the duration distribution ofunemployment, with particular emphasis on the changes in the durationdependence. I estimate a parametric duration model using cross-sectionaldata drawn from the Spanish Labor Force Survey from 1980 to 1994 to analyzethe chances of leaving unemployment before and after the introduction offixed-term contracts. I find that duration dependence has increased sincesuch reform. Semi-parametric estimation of the model also shows that forlong spells, the probability of leaving unemployment has decreased sincesuch reform.

Iowa Department of Transportation Office of Contracts Letting Summary July 1, 2006 through June 30, 2007

Twelve regularly scheduled lettings and seven emergency/special lettings were held by the Iowa Department of Transportation for construction and maintenance work during the period covered by this report. At these lettings, projects totaling $492,299,871 were approved.

Report of Highway Research Board Research and Development Activities FY2007

The Highway Division of the Iowa Department of Transportation (Iowa DOT) engages in research and development for two reasons: first, to find workable solutions to the many problems that require more than ordinary, routine investigation; second, to identify and implement improved engineering and management practices. This report, entitled “Iowa Highway Research Board Research and Development Activities FY2007” is submitted in compliance with Sections 310.36 and 312.3A, Code of Iowa, which direct the submission of a report of the Secondary Road Research Fund and the Street Research Fund respectively. It is a report of the status of research and development projects, which were in progress on June 30, 2007; it is also a report on projects completed during the fiscal year beginning July 1, 2006, and ending June 30, 2007. Detailed information on each of the research and development projects mentioned in this report is available in the Research and Technology Bureau in the Highway Division of the Iowa Department of Transportation.

The optimal length of contracts with application to outsourcing

This paper resolves three empirical puzzles in outsourcing by formalizing the adaptationcost of long-term performance contracts. Side-trading with a new partner alongside a long-term contract (to exploit an adaptation-requiring investment) is usually less effective than switching to the new partner when the contract expires. So long-term contracts that prevent holdup of specific investments may induce holdup of adaptation investments. Contract length therefore trades of specific and adaptation investments. Length should increase with the importance and specificity of self-investments, and decrease with the importance of adaptation investments for which side-trading is ineffective. My general model also shows how optimal length falls with cross-investments and wasteful investments.

Intraoperative angiography reloaded: a new hybrid operating theater for combined endovascular and surgical treatment of cerebral arteriovenous malformations: a pilot study on 25 patients.

BACKGROUND: Multimodality treatment suites for patients with cerebral arteriovenous malformations (AVM) have recently become available. This study was designed to evaluate feasibility, safety and impact on treatment of a new intraoperative flat-panel (FP) based integrated surgical and imaging suite for combined endovascular and surgical treatment of cerebral AVM. METHODS: Twenty-five patients with AVMs to treat with combined endovascular and surgical interventions were prospectively enrolled in this consecutive case series. The hybrid suite allows combined endovascular and surgical approaches with intraoperative scanner-like imaging (XperCT®) and intraoperative 3D rotational angiography (3D-RA). The impact of intraoperative multimodal imaging on feasibility, workflow of combined interventions, surgery, and unexpected imaging findings were analyzed. RESULTS: Twenty-five patients (mean age 38 ± 18.6 year) with a median Spetzler-Martin grade 2 AVM (range 1-4) underwent combined endovascular and surgical procedures. Sixteen patients presented with a ruptured AVM and nine with an unruptured AVM. In 16 % (n = 4) of cases, intraoperative imaging visualized AVM remnants ≤3 mm and allowed for completion of the resections in the same sessions. Complete resection was confirmed in all n = 16 patients who had follow-up angiography one year after surgery so far. All diagnostic and therapeutical steps, including angiographic control, were performed without having to move the patients CONCLUSION: The hybrid neurointerventional suite was shown to be a safe and useful setup which allowed for unconstrained combined microsurgical and neuroradiological workflow. It reduces the need for extraoperative angiographic controls and subsequent potential surgical revisions a second time, as small AVM remnants can be detected with high security.

On the valuation and incentive effects of executive cash bonus contracts

Executive compensation packages are often valued in an inconsistent manner: while employee stock options (ESOs) are typically valued ex-ante, cash bonuses are valued ex-post. This renders the existing valuation models of employee compensation packages theoretically unsatisfactory and, potentially, empirically distortive. In this paper, we propose an option-based framework for ex-ante valuation of cash bonus contracts. After obtaining closed-form expressions for ex-ante values of several frequently used types of bonus contracts, we utilize them to explore the e¤ects that the shape of a bonus contract has on the executive s attitude toward risk-taking. We, also, study pay-performance sensitivity of such contracts. We show that the terms of a bonus contract can dramatically impact both risk-taking behavior as well as pay-performance incentives. Several testable predictions are made, and venues of future research outlined.

Competition and cost overruns. Optimal misspecification of procurement contracts

Most cases of cost overruns in public procurement are related to important changes in the initial project design. This paper deals with the problem of design specification in public procurement and provides a rationale for design misspecification. We propose a model in which the sponsor decides how much to invest in design specification and awards competitively the project to a contractor. After the project has been awarded the sponsor engages in bilateral renegotiation with the contractor, in order to accommodate changes in the initial project s design that new information makes desirable. When procurement takes place in the presence of horizontally differentiated contractors, the design s specification level is seen to affect the resulting degree of competition. The paper highlights this interaction between market competition and design specification and shows that the sponsor s optimal strategy, when facing an imperfectly competitive market supply, is to underinvest in design specification so as to make significant cost overruns likely. Since no such misspecification occurs in a perfectly competitive market, cost overruns are seen to arise as a consequence of lack of competition in the procurement market.

Optimal contracts, adverse selection and social preferences: An experiment

It has long been standard in agency theory to search for incentive-compatible mechanisms on the assumption that people care only about their own material wealth. However, this assumption is clearly refuted by numerous experiments, and we feel that it may be useful to consider nonpecuniary utility in mechanism design and contract theory. Accordingly, we devise an experiment to explore optimal contracts in an adverse-selection context. A principal proposes one of three contract menus, each of which offers a choice of two incentive-compatible contracts, to two agents whose types are unknown to the principal. The agents know the set of possible menus, and choose to either accept one of the two contracts offered in the proposed menu or to reject the menu altogether; a rejection by either agent leads to lower (and equal) reservation payoffs for all parties. While all three possible menus favor the principal, they do so to varying degrees. We observe numerous rejections of the more lopsided menus, and approach an equilibrium where one of the more equitable contract menus (which one depends on the reservation payoffs) is proposed and agents accept a contract, selecting actions according to their types. Behavior is largely consistent with all recent models of social preferences, strongly suggesting there is value in considering nonpecuniary utility in agency theory.

Wild bids. Gambling for resurrection in procurement contracts

This paper analyzes the problem of abnormally low tenders in theprocurement process. Limited liability causes firms in a bad financialsituation to bid more aggressively than good firms in the procurementauction. Therefore, it is more likely that the winning firm is a firm infinancial difficulties with a high risk of bankruptcy. The paper analyzesthe different regulatory practices to face this problem with a specialemphasis on surety bonds used e.g. in the US. We characterize the optimalsurety bond and show that it does not coincide with the current USregulation. In particular we show that under a natural assumption the USregulation is too expensive and provides overinsurance to the problem ofabnormally low tenders.

Moral hazard and non-exclusive contracts

This paper studies equilibria for economies characterized by moral hazard(hidden action), in which the set of contracts marketed in equilibrium isdetermined by the interaction of financial intermediaries.The crucial aspect of the environment that we study is thatintermediaries are restricted to trade non-exclusive contracts: theagents' contractual relationships with competing intermediaries cannot bemonitored (or are not contractible upon). We fully characterize equilibrium allocations and contracts. In thisset-up equilibrium allocations are clearly incentive constrainedinefficient. A robust property of equilibria with non-exclusivity isthat the contracts issued in equilibrium do not implement the optimalaction. Moreover we prove that, whenever equilibrium contracts doimplement the optimal action, intermediaries make positive profits andequilibrium allocations are third best inefficient (where the definitionof third best efficiency accounts for constraints which capture thenon-exclusivity of contracts).

Financing constraints and fixed-term employment contracts

This paper studies the interactions between financing constraints and theemployment decisions of firms when both fixed-term and permanent employmentcontracts are available. We first develop a dynamic model that shows theeffects of financing constraints and firing costs on employment decisions. Oncecalibrated, the model shows that financially constrained firms tend to use moreintensely fixed term workers, and to make them absorb a larger fraction of thetotal employment volatility than financially unconstrained firms do. We testand confirm the predictions of the model on a unique panel data of Italian manufacturingfirms with detailed information about the type of workers employedby the firms and about firm financing constraints.

Annual Report of Iowa Highway Research Board Research and Development Activities FY 08

RESEARCH AND DEVELOPMENT The Highway Division of the Iowa Department of Transportation (Iowa DOT) engages in research and development for two reasons: first, to find workable solutions to the many problems that require more than ordinary, routine investigation; second, to identify and implement improved engineering and management practices. This report, entitled "Iowa Highway Research Board Research and Development Activities FY2008" is submitted in compliance with Sections 310.36 and 3 I2.3A, Code of Iowa, which direct the submission of a report of the Secondary Road Research Fund and the Street Research Fund respectively. It is a report of the status of research and development projects in progress on June 30, 2008; it is also a report on projects completed during the fiscal year beginning July 1, 2007, and ending June 30, 2008. Detailed information on each of the research and development projects mentioned in this report is available in the Research and Technology Bureau in the Highway Division of the Iowa Department of Transportation. IOWA HIGHWAY RESEARCH BOARD In developing a progressive, continuing and coordinated program of research and development, the Highway Division is assisted by the Iowa Highway Research Board. This advisory group was established in 1949 by the Iowa State Highway Commission to respond to the research denoted in Section 310.36 of the Code of Iowa and now is denoted by 312.3A. The Research Board consists of 15 regular members: seven Iowa county engineers, four Iowa DOT engineers, one representative from Iowa State University, one from The University of Iowa, and two engineers employed by Iowa municipalities. Each regular member may have an alternate who will serve at the request of the regular member. The regular members and their alternates are appointed for a three-year term. The membership of the Research Board as of June 30, 2008, is listed in Table I. The Research Board held nine regular meetings during the period ofJuly 1, 2007, to June 30, 2008. Suggestions for research and development were reviewed at these meetings and recommendations were made by the Board.