Contract Choice Research Articles

Currency Choice in Contracts

Abstract We study the interaction between the currency choice of private domestic contracts and optimal monetary policy. The optimal currency choice depends on the price risk of each currency, as well as on the covariance of its price and the relative consumption needs of the agents signing the contract. When a larger share of contracts is denominated in local currency, the government can use inflation more effectively to either redistribute resources or reduce default costs, which makes local currency more attractive for private contracts. When governments lack commitment, competitive equilibria can be constrained inefficient, thus providing a reason to regulate the currency choice of private contracts. We show that both the equilibrium use of local currency and the implications for regulation depend on the level of domestic policy risk. Our model can explain the wide use of the US dollar in international trade contracts and the observed hysteresis in dollarization.

How social communications affect product line design in the platform economy

The booming platform economy has made it very convenient for consumers to communicate with each other through social media whenever and wherever they want. As industry and academia have repeatedly confirmed, such social communications are now significantly changing firms' business and management practices. This paper studies how social communications affect an upstream firm's product line design in the platform economy when an online platform makes strategic contract choices. We show that for both wholesale and agency contracts, social communications increase the product line length while decreasing the product price and quality. We also identify the conditions under which social communications provide a firm with fewer incentives for product line extension under a wholesale contract than under an agency contract. On the platform side, we show that an agency contract can be preferred in the presence of social communications over a wholesale contract if and only if the commission rate is sufficiently high or both the commission rate and the product line extension fee are moderate.

Biofuel feedstock contract attributes, substitutability and tradeoffs in sugarcane production for ethanol in the Brazilian Cerrado: A stated choice approach

Biofuel expansion may entail elaborate contractual relationships between processors and farmers. Past studies have been limited to explaining choices between single contracts or standard land fixed rental versus crop share contracts. Little is known about how changes in contract attributes affect the probability of farmers' switching between contracts, if given the choice. Contract choice in turn, has implications for biofuel market structure and farmer welfare. Sugarcane expansion into the Brazilian Cerrado provides an optimal setting to investigate farmers’ willingness to enter into contractual arrangements with biofuel processors. The study design involves a hypothetical stated choice experiment conducted with farmers and landowners in the Cerrado. Respondents choose between three contract types (land rental, agricultural partnership, and supply) or to opt-out. A novel two-opt opt model was applied to better model the opt out decision. Data is analyzed using a random parameter mixed logit model. Willingness to pay for contract attributes highlight farmer preference for shorter contracts with higher revenues. Direct and cross-attribute elasticities results provide unique insight into how market competition and farmer welfare can be affected by the substitution between contract options. They show a larger probability of substitution from more autonomous (e.g. supply) to less autonomous (e.g. land rental) contracts. Farmer contract preferences can motivate vertical integration in the emerging biofuel market, potentially resulting in consequences for farmer welfare and long-run sustainability of biofuel production. Our findings provide guidance for countries seeking to expand biofuel production in areas with enrooted agricultural production systems.

Drop-shipping or batch ordering: Contract choice in the presence of information sharing and quality decision

This study investigates the manufacturer's contract choice (drop-shipping or batch ordering) and retailer's information sharing strategy in the presence of product quality decisions. The equilibrium outcomes give strategic choices for both the manufacturer and retailer. Specifically, the retailer prefers to share demand information when the quality investment efficiency is high under batch ordering contract, while he always chooses to share information under drop-shipping contract. Given no information sharing, the manufacturer chooses the batch ordering contract if the revenue-sharing rate is high. Given information sharing, the manufacturer prefers batch ordering contract when either of the following conditions holds: a) when the revenue-sharing rate is low and quality investment efficiency is low; b) when the revenue-sharing rate is high and quality investment efficiency is high; otherwise, the manufacturer prefers drop-shipping contract. Additionally, our results indicate that there may exist a “prisoner's dilemma” when the drop-shipping contract is a dominant strategy for the manufacturer and sharing demand information is a dominant strategy for the retailer.

Reference points and the tradeoff between risk and incentives

We conduct laboratory experiments to investigate basic predictions of principal-agent theory about the choice of piece rate contracts in the presence of output risk, and provide novel insights that reference dependent preferences affect the tradeoff between risk and incentives. Subjects in our experiments choose their compensation scheme for performing a real-effort task from a menu of linear piece rate and fixed payment combinations. As classical principal-agent models predict, more risk averse individuals choose lower piece rates. However, in contrast to those predictions, we find that low-productivity risk averse workers choose higher piece rates when the riskiness of the environment increases. We hypothesize that reference points affect piece rate choice in risky environments, such that individuals whose expected earnings would exceed (fall below) the reference point in a risk-free environment behave risk averse (seeking) in risky environments. In a second experiment, we exogenously manipulate reference points and confirm this hypothesis.

Supply Chain Contract Choice with Different Behavior Preferences of Retailer

Retailer may exhibit irrationality when facing the risk of demand uncertainty; therefore, we consider four retailer behavioral preferences: risk neutral (RN), waste aversion (WA), stockout aversion (SA), and stockout-waste aversion (SW). The decision-making and contract choice of upstream and downstream enterprises in cases where demand depends on supplier’s effort are studied. The results show that if the retailer has only SA or RN preferences, then the supplier prefers to choose a wholesale price contract, while the retailer does the opposite, if the retailer has only WA, then the supplier prefers to choose a revenue sharing contract, but the retailer’s contract choice depends on the degree of waste aversion, and if the retailer has SW, then the contract choice of upstream and downstream enterprises is related to the degree of waste aversion and stockout aversion.

Impact of Contract Choice on the Public-Private Partnerships’ Performance: A Tale of Two Contracts

This paper attempts to answer the question “how do contract choices impact PPP performance?” It pursues an unusual approach by focusing on the contract attributes rather than the transaction attributes of the transaction cost economics’ framework. PPP performance is assessed by analyzing 157 Indian highways projects based on a unique set-up of two contract types. The paper employs the LOGIT and difference in difference techniques for empirical testing. Research findings exposit how varying intensity of contractual attributes can impact on the project outcomes, where contracts with tighter budget constraints could deliver better results in terms of lower cost and time overruns than its counterpart contracts. The paper also compares two contract regimes, which is marked by the modification and standardization of both contract types. This regime segregation allows the performance comparison within each contract type. The newer regime introduced more liberal and open-ended definitions without requisite incentives and checks. Change in definitions could achieve some semblance of lower probability of time overrun, but not the actual timely project completion. The empirical results explicate how modified definitions can produce misleading project outcomes. These research findings can help the policymakers to choose and design the contracts aligning with its contractual objectives.

Adoption of contract farming for managing agricultural risks: a case study in rice production in the Mekong Delta, Vietnam

Purpose Farmers' risk attitudes and risk perceptions play an essential role in shaping risk management strategies to address risks and uncertainties. Contract farming is considered as one of the feasible approaches to tackle farmers' concerns. However, risk perspectives under various categories have not been included in studies on farmers' preferences for contract farming in the literature, especially in Vietnam. This study aims to determine factors affecting farmers' choices of different contract farming practices. Design/methodology/approach The explanatory factor analysis (EFA) and multinomial logit model (MNL) were applied to explore the impacts of risk perspectives on farmers' preferences for contract farming. Data have been collected from 211 rice farmers in An Giang Province, “the rice bowl” of the Mekong Delta, Vietnam. Findings The study found that farm size, cooperatives, extension, market access and trust have significantly impacted on contract participation while a delay payment was a barrier for farmers' motivation to opt for the contract. Farmers' contract choices were also influenced by their risk attitudes and perceptions under different risk dimensions. The financial, policy and human risk-averse behavior predisposed farmers to single out the full contract while the policy and human risk-loving and production, market and finance risk-averse respondents were in favor of the marketing contract. Moreover, the findings indicated that the more farmers concerned about risk of weather and market, the more choices for the full contract, whereas the risk perceptions of weather and policy encouraged farmers to use the limited contract. By contrast, farmers who perceived the impacts of risk of diseases/pests and human were likely to adopt the marketing contract. Research limitations/implications This study just focuses on collecting data from farmers’ perspective. Future studies involving stakeholders such as enterprises and policy makers are strongly recommended so as to design suitable contracts and enforce contract schemes effectively in Vietnam. Originality/value The findings also contribute to the literature on different types of contracts and the multidimensional aspect of risk for rice production in Vietnam.

Agricultural development in industrialising Japan, 1880–1940

AbstractThis study reviews research examining agricultural development in industrialising Japan. We focus on the (dys)functioning of markets for land, finance, labour and agricultural commodities. We cover topics including land (mis)allocation, size‐productivity relationships, tenancy contract choice and Marshallian inefficiency, property rights, microfinance, shock‐coping strategies, rural–urban migration and agricultural market integration. The literature reveals that market failures often observed in developing economies were not prominent, except for possibly labour markets. The literature also highlights the roles and administrative capacities of central and local governments. Tight local communities served to reduce transaction costs.

Marketing contract choices in agriculture: The role of price expectation and price risk management

AbstractWe identify factors involved in the decision of farmers to use marketing contracts (pool, storage and forward contracts), and we explicitly account for the hedging and price‐enhancement components of this decision. Using panel corner solution models (Tobit and double‐hurdle) to represent farmers’ contracting decision using a sample of French cereal producers, we find that both the hedging and the price‐enhancement motives are important factors driving marketing choices. When risk aversion or exposure to price risk rises, the price‐enhancement motive becomes less influential. Farmers appear to be more reluctant to base their marketing decisions on their price expectations in that case.

Legal Environment and Contractual Choice

Abstract This paper considers contractual choice under imperfect legal systems, in particular, contracts with different timing of payment. Ex-ante payment contracts are risky for the buyer, because the seller may shirk. Ex-post payment contracts are risky for the seller, as the buyer may default. Optimal contract is solved for any given legal environment. Exchanges with lower gains from trade tend to adopt ex-post payment contracts. The seller is a better proposer than the buyer in terms of the efficiency of the proposed contract. Surprisingly, offering ex-ante payment contracts is not strictly better for the seller under any legal environment. Moreover, mixed payment contracts are also analyzed and shown to never be optimal.

The Power of Renegotiation and Monitoring in Software Outsourcing: Substitutes or Complements?

Monitoring and contract renegotiation are two common solutions for addressing information asymmetry and uncertainty between a client and a vendor of software outsourcing services. Monitoring is mostly applied in time-and-materials contracts, as a basis for inspecting and reimbursing the vendor’s efforts in system development. Renegotiation, by contrast, is deployed in fixed-price and time-and-materials contracts to mitigate the loss of surplus from uncertainty after system development. We investigate the interaction between monitoring and renegotiation and examine the corresponding contract choice problem. We find that the client benefits from renegotiation based on two effects: an uncertainty-resolution effect and a post-development incentive effect, which incentivizes the vendor to exert additional effort in system development. Monitoring does not resolve uncertainty, although it does encourage the vendor to exert additional effort, a pre-development incentive effect. Our analysis shows that the choice of renegotiation or monitoring depends on the interactions of the above effects, which are moderated by the renegotiation cost, monitoring cost, and bargaining power in renegotiation. When renegotiation cost is low: if the client has high bargaining power and low monitoring cost, monitoring and renegotiation are complements and both are selected; otherwise, the two instruments are substitutes and contract renegotiation is preferred. When renegotiation cost is high: monitoring substitutes for renegotiation and the client only chooses monitoring if the cost to do it is low; or else neither is used. Overall, this research shows that four appropriate contract strategies should be used under somewhat different circumstances. We further analyze the impacts of some other key aspects of software outsourcing and extend the base model to address two alternative situations to show the robustness of our findings. The results apply to a range of software reliability growth models, including when machine learning or cloud computing are used.

Labour supply, service intensity, and contracts: Theory and evidence on physicians

SummaryBased on linked administrative and survey panel data, we analyse the labour supply behaviour of physicians who could adopt either a standard fee‐for‐service contract or a mixed remuneration (MR) contract. Under MR, physicians received a per diem and a reduced fee for services provided. We present estimates of a structural discrete choice model that incorporates service intensity (services provided per hour) and contract choice into a labour supply framework. We use our estimates to predict (ex ante) the effects of contracts on physician behaviour and welfare, as measured by average equivalent variations. The supply of services is reduced under an MR contract, suggesting incentives matter. Hours spent seeing patients is less sensitive to incentives than the supply of services. Our results suggest that a reform forcing all physicians to adopt the MR system would have substantially larger effects on physician behaviour than were measured under the observed reform. A pure salary (per diem) reform would sharply reduce services but would increase time spent seeing patients.

Household risk preferences and forestland use right transactions in China: tenure security or price illusion?

ABSTRACT Forestland use right transactions (FURT) are mechanisms developed by China’s central government to cope with the problem of fragmented forestlands stemming from Collective Forest Tenure Reform (CFTR). We hypothesize that the rate of FURT remains surprisingly low after the CFTR because of households’ decision-making behavior, which depends on individual attitudes toward risks and benefits, namely risk preference. Game experiments were used to measure individual risk preferences in 301 rural households in Fujian Province, China. The results show that risk and loss averse households are less willing to participate in FURT, whether for renting-in or renting-out forestlands. When it comes to FURT contract choice, risk and loss averse households prefer to choose informal oral agreements with relatives and friends for short-term, relatively low, one-off payments. Our results also indicate that perceptions of secure forestland tenure could promote household’s renting-in of forestlands and weaken the negative impact of household risk preference. Meanwhile, risk and loss averse sellers generally give relative high price evaluations on their forestlands, which inhibits their possibilities to successfully rent-out. This study contributes to a better understanding of the relationship between household risk preference and FURT decisions, and will help inform the design of alternative policies that could promote FURT in China.

Contract choice for upstream innovation in a finance‐constrained supply chain

AbstractThis study explores a supply chain with one finance‐constrained upstream startup supplier that invests in quality innovation and one downstream manufacturer that sells to consumers under demand uncertainty. The survival and profit‐seeking cases are investigated for the startup supplier. The manufacturer supports quality innovation by the startup supplier via an investment‐sharing contract. The results show that when making quality investment decisions, the survival‐seeking supplier focuses on financial constraints, whereby large constraints pressure the firm to invest more in quality innovation. By contrast, profit‐seeking suppliers are encouraged by a large potential market. Investment‐sharing contracts are proven to facilitate "win‐win" vertical R&D cooperation in the supply chain. Last, by introducing a revenue‐sharing contract and comparing it with an investment‐sharing contract, our numerical analyses show how the manufacturer should select the appropriate contract as key parameters change.

Canals, climate, and corruption: The provisioning of public infrastructure under uncertainty

AbstractWe develop a two‐stage model to study the strategic interaction between a politician (the principal) and a bureaucrat (the agent) over the level of infrastructure provision with uncertainty about possible weather shocks. The bureaucrat chooses how much effort to contribute to infrastructure maintenance and the politician offers either a lump‐sum wage (non‐corrupt) contract or proportional bribe (corrupt) contract to induce effort. The degree of uncertainty about weather shocks, the size of the fixed wage, and the level of external monitoring to detect corruption all interact to affect (a) the politician's choice of contract and (b) whether this choice improves infrastructure outcomes. Our results suggest that curbing corruption is most likely to yield improvements in infrastructure provision when climate uncertainty is low and when bureaucratic wages are relatively high. If climate uncertainty is high, increasing monitoring has an unambiguous negative effect on infrastructure provision. Previous literature has focused either on public goods provision but not corruption or on bribery in a regulatory context that lacks public goods provision. We extend both literatures by analyzing how bribes between government officials affect a principal's ability to more effectively incentivize public goods provision by her agent.

How do cultural difference, cultural exposure, and CQ affect interpretations of trust from contract choices? Evidence from dyadic cross-country experiments

Global practices such as offshoring and expatriation of employees increase cross-cultural interactions within and across firms. In this paper, we use three experiments to investigate the effects of cultural differences on employees' interpretations of employers' contract choices. Applying insights from attribution theory, we predict that cultural differences will reduce the likelihood for employees to attribute employers' choice of a more-trusting contract to trust. This in turn will reduce the ability of such contracts to motivate higher employee effort. However, we also suggest that three interventions will mitigate the negative effect of cultural differences: employees' prior and primed exposure to employers' culture and employees' interactional cultural intelligence. In our labor market setting, employers chose a hiring contract for employees who, in return, indicated their effort levels. In all experiments, dyads interacted in real-time either in the same country or across two countries with high cultural difference. Consistent with our predictions, we find that the effectiveness of a bonus contract in increasing employees' effort is reduced by high cultural difference (in experiment 1). We also find that employees' exposure to employers' culture, either due to prior exposure (in experiment 2) or by priming exposure through culture-specific training (in experiment 3) has a mitigating effect. Finally, we find partial support that employees’ interactional cultural intelligence (CQ) has a mitigating effect. Implications to theory and practice are discussed.

Political opportunism and transaction costs in contractual choice of public–private partnerships

AbstractThe New Public Management (NPM) has achieved many successes in public service delivery, but practitioners frequently observed failures in developing and transitional economies. For instance, China's public–private partnerships (PPP) since 2014 have failed to transfer risks to the private sector, to involve private skills and expertise, and to reduce local government's debt. This article claims that PPP failures in China are associated with the contractual type of nonconcessions and the contractual choice is influenced by both political opportunism and transaction costs. Utilizing data of PPP projects in China during 2014–2016, we find that more opportunistic bureaucrats seek to increase projects of nonconcessions, but transaction costs caused by product complexities hinder governments' reliance on nonconcessions. This research extends the core analysis of PPPs in the literature from transaction costs to political opportunism, which widely exists in developing and transitional economies. Thus, our findings partially explain the failure of their NPM practices.新公共管理运动在公共服务供给领域取得了瞩目的成就，但在发展中国家与转型经济体中也经历过挫折。例如，自2014年以来，中国推行的政府与社会资本合作(PPP)模式就未能实现将风险转移到私营部门、引入私营部门的技术和经验及减轻地方政府的债务负担的初衷。正鉴于此，在2017年时，中国财政部对PPP项目进行了大范围的整改。针对这一现象，本文理论分析认为，其主要原因在于地方政府采用了大量非特许经营合同，而该类合同具有低风险、弱运营及政府付费的特征。政府之所以选择此类合同，则基于政治机会主义与交易成本两个方面的考量。进一步，本文基于中国2014–2016年PPP项目的数据，通过实证研究发现:地方主政官员晋升压力越大，其短期拉动GDP增长的动机越强，从而通过非特许经营合同上马的基建项目就越多；但是，项目自身的复杂性会导致非特许经营合同在长期产生高昂的交易成本，从而抑制地方政府上马此类项目。本研究将PPP的研究视角从交易成本拓展到政治机会主义，从而更为全面地阐述了新公共管理运动在转型国家更易遭遇挫折的原因。

Would Reasonable People Endorse a ‘Content-Neutral’ Law of Contract?

Abstract This essay raises two challenges to Peter Benson’s compelling new account of contract law. First, I argue that Benson’s use of the concept of reasonableness goes beyond the Rawlsian account to require that we impute to others a capacity to transcend their contingent circumstances in the context of contractual choice. In fact, our choices in contract are driven by external contingencies and it is only reasonable to take those constrains on other people’s choices into account. Second, I contest Benson’s related claim that contract law should be, and largely is, content-neutral. I argue to the contrary that the justice of a society depends on the cumulative outcomes from market transactions, and the justice of transactions depends on the justice of the institutional matrix of which transactional law is one part.

Low-carbon technology transfer between rival firms under cap-and-trade policies

We investigate the effects of low-carbon technology transfer between two rival manufacturers on their economic, environmental, and social welfare performance under a cap-and-trade policy. We model alternative licensing arrangements of technology transfer and evaluate the model performance from the perspectives of different stakeholders, including manufacturers, customers, and policy makers. Our findings show that the contractual choice on low-carbon technology licensing is dependent on the trade-off between the benefits gained from the licensing of technology and the consequential losses incurred from competition with a strengthened competitor, which is influenced by a combination of factors, including internal technological abilities, the interfirm power relationship, external market competition, and the carbon emission control policy. Among them, the interfirm power relationship is most influential in determining the optimal contractual decision. In addition, we extend the analysis of technology licensing strategies to different carbon emissions caps with additional cost incurred from purchasing emission allowances through auction, and a two-period model considering emissions cap reduction, respectively. Finally, our analyses show it is critical for policy makers to develop appropriate emissions control policies to promote the agenda of a sustainable, low-carbon economy.