Contingent Contracts Research Articles

Contingent cash crunch: How do performance commitments affect acquirer liquidity?

This paper investigates how performance commitment clauses in mergers and acquisitions (M&As) influence the corporate liquidity of acquiring firms. Using a comprehensive dataset of Chinese domestic M&A deals from 2008 to 2021, we find that acquisitions involving performance commitments correspond to lower corporate liquidity for acquirers in subsequent years. Difference-in-differences analysis, instrumental variables, and propensity score matching support a causal relationship. Furthermore, cross-sectional tests reveal that this negative association is amplified for nonstate ownership, weak governance, poor reporting quality, and low financial constraints. We find that performance commitments increase management optimism, providing insights into the mechanisms linking contingent deal structures with suboptimal liquidity policies and heightened financial distress. Our study suggests that the contingent contract structures in M&A deals drain corporate liquidity, leaving firms financially vulnerable.

Overcoming contract incompleteness: evidence from long-term supply relationships

This paper explains how firms address contract incompleteness in long-term supply relationships. For firms, it is practically impossible to assess all future eventualities, draft complete and fully contingent contracts, observe and verify the agreed performance. Based on an empirical investigation of long-term supply relationships between agribusiness and farms in India, we present evidence that under certain conditions overcoming contractual incompleteness is possible. We argue that firms are better able to deal with contract incompleteness when they specify contract clauses that regulate (1) recurrent interaction, (2) relational frame and (3) nonlegal enforceability. These three mechanisms of contract clauses enable firms to preserve the substance of how they wish to relate to each other and simultaneously allow them to remain sufficiently flexible to embrace new opportunities.

Rating disclosure analysis: compensation reform consequence on counteracting biased credit ratings

This study analyzes a compensation reform proposal designed to prevent inaccurate ratings produced by credit rating agencies (CRAs). Specifically, the CRA’s incentive to exert effort to observe the portfolio’s signal and adopt the rating disclosure policy is investigated under the rating-contingent and incentive-based contract. The issuer has a risky portfolio and solicits a rating from the CRA, which endogenously observes a signal and decides on a rating disclosure policy during the rating production process. The findings reveal that the CRA exerts no effort to observe a signal and inflate the rating under the rating contingent contract. Under the incentive-based contract, the CRA always exerts an optimal effort to observe a signal and adopt the full disclosure regime. Hence, the incentive-based contract better incentivizes the CRA to exert more effort to improve rating accuracy and implement the full disclosure policy than the rating contingent contract.

Contingent Contracts in Banking: Insurance or Risk Magnification?

AbstractWhat happens when banks compete with deposit and loan contracts contingent on macro‐economic shocks? The private sector insures the banking system efficiently against crises through such contracts when failing banks go bankrupt. When risks are large, banks may shift part of the risk to depositors who receive state‐contingent contracts. In contrast, when failing banks are rescued, new phenomena such as risk magnification emerge. Depositors receive noncontingent contracts, while loan contracts demand high repayment in good times and low repayment in bad times. Banks overinvest and generate large macro‐economic risks, even if the underlying productivity risk is small or zero.

Making sovereign debt safe with a financial stability fund

We develop an optimal design of a Financial Stability Fund that coexists with the international debt market. The sovereign can borrow defaultable bonds on the private international market, while having with the Fund a long-term contingent contract subject to limited enforcement constraints. The Fund contract does not have ex ante conditionality, but requires an accurate country-specific risk-assessment (DSA), accounting for the Fund contract. The Fund periodically announces the level of liabilities the country can sustain to achieve the constrained efficient allocation. The Fund is only required minimal absorption of the sovereign debt, but it must provide insurance (Arrow-securities) to the country. Furthermore, with the Fund all sovereign debt is safe independently of the seniority structure; however, for the Fund, seniority may require a greater minimal absorption than a pari passu regime. We calibrate our model to the Italian economy and show it would have had a more efficient path of debt accumulation with the Fund.

Grandparent-Implemented Interventions to Reduce Challenging Behavior of an Adult With Autism: A Pilot Telehealth Case Study

Adults with autism spectrum disorder (ASD) often engage in challenging behavior that requires individualized intervention to remediate. However, access to high-quality services is limited for adults, leaving this population without necessary behavioral healthcare. This study addressed the needs of a 22-year-old man with ASD and intellectual disability (ID) who lived with his grandmother and engaged in tangibly maintained challenging behavior. The interventionist coached his grandmother via telehealth in the implementation of two behavior analytic interventions: signaled multiple schedule arrangement and a modified contingency contract. The effects of the interventions were evaluated using an alternating treatments design with baseline. While both interventions were effective at decreasing challenging behavior when compared to baseline, the signaled multiple schedule arrangement resulted in zero instances of challenging behavior. Both the participant and the grandparent completed post-intervention social validity assessments and reported overall positive satisfaction with the interventions. Practice recommendations are presented.

Wage dispersion with heterogeneous wage contracts

I study a labor market in which identical workers search on- and off-the-job and heterogeneous firms employ using either an ex-ante posted wage or flexible wage contracts contingent on outside options. Firm level costs for contingent contracts generate a segmented equilibrium in which less productive firms post wages. The model with heterogeneous contracts can achieve wage dispersion, labor share, employment transitions, and flow value of unemployment that are simultaneously consistent with empirical observations while capturing information frictions and search externalities modeled by ex-ante wage posting. In contrast to well known results regarding pure wage posting models, a good fit to these data can be achieved even when the vast majority of firms post wages. Matching to moments for the U.S. economy in the 2010s implies roughly 58 percent of firms post wages and employ nearly 30 percent of workers under such contracts.

Productivity Shocks, Long-Term Contracts, and Earnings Dynamics

This paper examines how employer- and worker-specific productivity shocks transmit to earnings and employment. We develop an equilibrium search model and characterize the optimal contract offered by firms. Risk-neutral firms provide partial insurance against shocks to risk-averse workers and offer contingent contracts, where payments are backloaded in good times and frontloaded in bad times. The model is estimated on matched employer-employee data from Sweden. Firms absorb persistent worker and firm shocks, with respective passthrough values of 26 and 10 percent. We evaluate the effects of redistributive policies and find that 30 percent of government insurance is undone by crowding out firm insurance. (JEL D86, H23, J24, J31, J41, J62)

Bargaining over Contingent Contracts under Incomplete Information

We study bargaining over contingent contracts in problems where private information becomes public or verifiable when the time comes to implement the agreement. We suggest a simple, two-stage game that incorporates important aspects of bargaining. We characterize equilibria in which parties always reach agreement, and study their limits as bargaining frictions vanish. Under mild regularity conditions, we show all interim-efficient limits belong to Myerson’s (1984) axiomatic solution. Furthermore, all limits must be interim efficient if equilibrium beliefs satisfy no-signaling-what-you-don’ t-know. Results extend to other bargaining protocols. (JEL C78, D82, D83, D86)

Interventions for High-Burden Infectious Diseases in Children and Adolescents: A Meta-analysis.

Approximately 2.2 million deaths were reported among school-age children and young people in 2019, and infectious diseases remain the leading causes of morbidity and mortality, especially in low and middle-income countries. We aim to synthesize evidence on interventions for high-burden infectious diseases among children and adolescents aged 5 to 19 years. We conducted a comprehensive literature search until December 31, 2020. Two review authors independently screened studies for relevance, extracted data, and assessed risk of bias. We included a total of 31 studies, including 81 596 participants. Sixteen studies focused on diarrhea; 6 on tuberculosis; 2 on human immunodeficiency virus; 2 on measles; 1 study each on acute respiratory infections, malaria, and urinary tract infections; and 2 studies targeted multiple diseases. We did not find any study on other high burden infectious diseases among this age group. We could not perform meta-analysis for most outcomes because of variances in interventions and outcomes. Findings suggests that for diarrhea, water treatment, water filtration, and zinc supplementation have some protective effect. For tuberculosis, peer counseling, contingency contract, and training of health care workers led to improvements in tuberculosis detection and treatment completion. Continuation of cotrimoxazole therapy reduced the risk of tuberculosis and hospitalizations among human immunodeficiency virus-infected children and reduced measles complications and pneumonia cases among measles-infected children. Zinc supplementation led to a faster recovery in urinary tract infections with a positive effect in reducing symptoms. There is scarcity of data on the effectiveness of interventions for high-burden infectious diseases among school-aged children and adolescents.

Scholars for a New Deal for Higher Education: Taking on Austerity

Scholars for a New Deal for Higher Education: Taking on Austerity

Technology-based contingency management for walking to prevent prolonged periods of workday sitting.

Sedentary behavior is an emerging public health issue. Frequent, brief bouts of walking are recommended by experts to reduce the health risks correlated with physical inactivity and prolonged sedentary periods. The purpose of the current study was to extend the literature by evaluating a remote, technology-based contingency management (CM) intervention that reinforced frequent, brief bouts of walking to decrease prolonged periods of sitting during the workday. A packaged intervention consisting of a contingency contract, monetary incentives, goal setting, textual prompts, and performance feedback was implemented with individuals with sedentary job responsibilities working from home during the COVID-19 pandemic. The intervention increased the number of physically active intervals to mastery for 4 participants, thereby disrupting prolonged periods of sedentary time. For 2 participants, the intervention did not meaningfully increase the number of physically active intervals. Results suggest that a remote, digital CM intervention can decrease sedentary behavior in home office environments.

Effects of Cooperative Learning and Contingency Contracting on Attention Deficit Hyperactivity Disorder Among Pupils With Learning Disabilities in Mathematics in Owerri, Nigeria

The study adopted pretest-posttest, control group quasi-experimental design with a 3x2x2 factorial matrix. Multi-stage sampling technique was used to select ninety participants from three randomly selected public primary schools in the three local governments in Owerri. The participants were randomly assigned to treatments and control groups. Participants in the two treatment groups were exposed to eight weeks of cooperative learning strategy and contingency contracting technique. Two instruments used were: Vanderbilt ADHD Diagnostic Teacher Rating Scale (α= 0.93) and Woodcock-Johnson III Mathematics Fluency Achievement Tests Scale (α= 0.84). Two hypotheses were tested at 0.05 level of significance. Data were analysed using Analysis of Covariance. There is a significant main effect of treatment on ADHD pupils with learning disabilities in mathematics (F (2, 78) = 127.29, p<0.05). Cooperative learning strategy was more effective in improving Mathematics competence skills ( = 96.6) of ADHD pupils with learning disabilities in mathematics than contingency contracting technique. Furthermore, there is no significant interaction effect of treatment, age and gender on ADHD pupils with learning disabilities in mathematics in the study. Therefore, the findings of the study suggest that teachers should endevour to use appropriate teaching methods, cooperative learning strategy and contingency contracting technique to reinforce positive attitude to teaching-learning situations among ADHD pupils with learning disabilities in mathematics.

On the values of Bayesian cooperative games with sidepayments

In this paper, we study the solution concept of value in transferable utility (TU) games with asymmetric information. In our model contingent contracts are required to be incentive compatible, and thus utility might not be not fully transferable. Our approach differs from the standard methodology of TU games with complete information, which summarizes the cooperative possibilities through the characteristic function. Instead, we consider a model in which monetary transfers are modeled as additional sidepayments in a non-transferable utility (NTU) game. Our main result states that [18] generalization of the Shapley NTU value and Salamanca (2020) extension of the Harsanyi NTU value are interim utility equivalent in our model with sidepayments. As a consequence of this result, we obtain a generalization of the Shapley TU value to games with incomplete information. Its formula, however, cannot be described by a simple closed form expression as in the case of complete information.

How Do Employers Choose between Types of Contingent Work? Costs, Control, and Institutional Toying

The increasing variety of contingent work raises the question of how employers choose between various types of contractual arrangements. The authors review relevant Employment Relations and Strategic HRM literature and distinguish four types of contingent contracts along the dimensions of costs and control. They argue that employers are making choices based on cost and control constraints but are able to reshape these constraints through “institutional toying.” Their case study of a German manufacturing plant and R&amp;D center illustrates the mechanisms of institutional toying, which are consistent with the literature on institutional loopholes and exit options. The article develops propositions that explain the diversity of contingent work arrangements and show how toying strategies enlarge the range of options available to employers.

Democratic silence: two forms of domination in the social contract tradition

ABSTRACT The social contract tradition has been critiqued for harboring ‘domination contracts’ that exclude women, people of color, people with disabilities, and others from political life. In this article, I build on these critical analyses to argue that the liberal ideal of the reasoning and speaking citizen entails the anti-democratic disqualification of ‘silent’ citizens such as young children and many peoples with intellectual disabilities. The liberal veneration of voice and the corollary vilification of silence represent the internal logic of all domination contracts, since it is by comparison to silent children and peoples with disabilities that groups such as women and people of color are viewed as justifiably excluded. I identify two distinct but interacting forms of liberal disqualification: (1) contingent domination contracts, which can be potentially disputed and temporarily resolved by proving a group’s fulfilment of the qualifications of speech and reason; and (2) structural domination contracts, which cannot be resolved for ‘silent’ citizens. Moreover, any viable challenge to a contingent domination contract must centre on the democratic inclusion of silent citizens, which itself will require the reconceptualization and redesign of political processes, as well as workplaces, economies, and other social institutions.

English

Respecting individual differences among students and meeting their unique needs may be one of the greatest challenges faced by teachers. When having a heterogeneous group of students, teachers need to consider a variety of instructional methods. The literature details a large number of teaching strategies supported by research findings, and the purpose of this review is to add to the literature by highlighting important information obtained from research on contingency contracting. This information includes the steps for creating and implementing contingency contracting, types of students with whom it can be used, and types of skills and behaviors that can be targeted. The review results show that contingency contracting is an easy-to-implement strategy that can be effectively used to teach both academic and non-academic skills to students with different characteristics. The results also suggest several practical implications for teachers and several areas of research that need further investigation. &nbsp; Key words: Contingency contracting, behavioral contracts, special education, students with disabilities.

State contingent banking and asset price bubbles: The case of Islamic banking industry

This paper examines how state contingent banking can help neutralize challenges like debt overhang and lack of optimal risk takings, problems associated with conventional banking that can eventually manifest in the creation of asset price bubbles and a financial crisis. Our analysis also contributes to the literature on Islamic banking which considers state contingent contracts as ideal from a religious perspective. We develop a model of banking with state contingent contracts on the liability and asset sides. Our model shows that in state contingent banking, the returns for the depositors, bank and the borrowers are more aligned with the real economy, which reduces the incentive for excessive borrowing, lending and investing. Our model also shows that with the state contingent banking on the liability side, during periods of heightened macroeconomic risk, depositors' payoff would be more volatile reducing the liquidity influx from the real economy to the banking sector. This neutralizes the pressure on state contingent banks to excessively lend on the asset side. Our model further demonstrates that state contingent contracts on the asset side can help avoid too much (or too little) lending by reducing the managerial discretion in charging low (or high) interest rates. With returns linked to the prices of the underlying assets, state contingent contracts may prevent lack of optimal risk taking.

Dynamic Slot Allocations with Different Patience Levels

This study considers a mechanism design problem in which service slots are allocated over time to buyers arriving at different periods. Some buyers can accept delayed service, whereas others cannot. Buyers have a multidimensional type representing their valuation and patience level. The seller fully commits to a mechanism with or without complete contingent contracts. We show that a deterministic mechanism is periodic ex-post incentive compatible if and only if the allocation rule is monotone in valuation and the equivalence holds. In cases both with and without contingent contracts, the dynamic pivot mechanism with a reserve price maximizes the seller's expected revenue under a regularity condition, which is characterized by the linearity of the virtual valuation function. When the regularity holds, the fully optimal mechanism with contingent contracts is multi-contracting-proof, whereas the constrained optimal mechanism without contingent contracts is not.

Screening with Network Externalities

Network externality is a prominent feature of increasingly many products: the marginal payoff of one’s consumption increases as his neighbors consume more. In- formation of network structure is important to the seller, but is often privately known to the buyers. We model a monopoly’s optimal pricing strategy to “screen” buyers’ network information: their susceptibility (out-degree) and influence (in-degree). Our main result is that susceptibility and influence have different effects on the optimal allocations and can be separated out in the optimal screening contracts. Specifically, we characterize the optimal allocations for both directed networks where each buyer’s susceptibility and influence are independent, and undirected networks where the two are identical. For directed networks, we show the optimal allocation only depends on a buyer’s susceptibility and exhibits simple forms with quadratic intrinsic value. We further contrast the analysis with two benchmarks – complete information pricing and uniform pricing – to shed light on the value of screening and the value of network in- formation. For undirected networks, we show the seller directly screens buyers on their susceptibility and indirectly condition the allocations on their inferred influence. We also extend the model to accommodate for (1) weak affiliation between a buyer’s susceptibility and influence, (2) the case in which the monopoly can incentivize influence with contingent contracts (referral bonuses), and (3) the situation in which susceptibility and influence are endogenous to the optimal allocations.