Contract Choice Research Articles

Exploitative Contracting in a Life Cycle Savings Model

Abstract This paper analyses the interaction between a present-biased saver and profit-maximising financial providers. Using a tractable theoretical model, I find that a naïve present-biased agent selects an ‘ineffciently cheap’ (low-yield, low-fee) contract when the income effect of an interest rate change is sufficiently strong, and an ‘inefficiently expensive’ (high-yield, high-fee) contract otherwise. Subsequently, I embed the contract choice in a calibrated life-cycle model. Given the extent of present bias, exploitative contracting reduces the naïve agent's pension wealth by 8%, lowering expected annual consumption in retirement by 3%. The associated loss of consumer welfare corresponds to 0:23% of annual consumption.

Brand loyalty, managerial delegation and position choices: Bertrand versus Cournot competition

In a mature product market, brands compete aggressively with each other using a marketing mix that includes position, pricing, and managerial delegation to win loyal customers and gain a larger market share. We examine the effects of brand loyalty on the endogenous choices of managerial compensation contracts and optimal brand positions in an uncovered market model. We analytically compare 18 symmetric and asymmetric mutual delegation cases associated with three delegation schemes—no delegation, sales delegation and relative performance (RP) delegation—in the Bertrand and Cournot competition modes. In the case of symmetric mutual contracts, under Bertrand competition, a price commitment effect resulting from the delegation decision weakens the competition, inducing higher prices and profits for both brands regardless of the type of delegation scheme. Under Cournot competition, delegation decisions can be viewed as signals to promote competition, intensifying the degree of competition. To acquire more loyal customers and higher profits, mutual RP delegation is the dominant choice under Bertrand competition, whereas mutual profit maximization is the dominant choice under Cournot competition. Furthermore, the social welfare is the highest when both brands optimally choose the RP delegation under Bertrand or optimally choose no delegation under Cournot; however, consumer surpluses are the lowest in both optimal cases.

Full Quantity or Full Credit? Choosing the Right Buyback Policy for a Behavioral Retailer

Problem definition: Despite extensive research on buyback contracts in supply chain management, little attention has been given to a direct comparison between a traditional full-quantity, partial-credit (FQ) buyback contract and an alternative full-credit, partial-quantity (FC) contract, especially when considering the behavioral biases of the retailer. This study aims to fill this research gap by exploring how these biases influence contract performance and offer practical guidelines for suppliers. Methodology/results: Through controlled laboratory experiments and structural model estimation, we show that the ordering decisions made by human retailers are jointly affected by three behavioral biases—loss aversion, prospective accounting, and psychological cost of inventory error—and these biases differ in magnitude between the two contracts. Incorporating these biases into a behavioral retailer’s utility function, we then analytically examine which buyback policy the supplier should choose. When the wholesale price is exogenously given, the supplier should adopt the FC contract for high-margin (low-cost) products. Conversely, when the supplier has the power to set both the wholesale and buyback prices, the FC contract is generally more beneficial for low-margin products. Finally, when the product cost is sufficiently high, a wholesale price contract may be advantageous over buyback policies. Managerial implications: The managerial implication of this paper is significant for suppliers who have to choose between different buyback policies. The paper suggests that the supplier should carefully consider not just the economic, but also the behavioral dimensions when making contract decisions, particularly when dealing with a retailer influenced by behavioral biases. Specifically, the choice between FQ and FC contracts is influenced by two key environmental factors: the production cost of the product and the nature of wholesale pricing. Understanding these elements allows suppliers to be flexible in contract choices and design appropriate return policies for their downstream supply chain partners. Funding: P. Yu was supported by the National Natural Science Foundation of China [Grants 72371038 and 72033003] and the Fundamental Research Funds for the Central Universities [Grant 2024CDJSKPT16]. T. Feng was supported by the National Natural Science Foundation of China [Grant 72131004]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2023.0574 .

Behavioral preferences and contract choice in the residential solar PV market

AbstractGreater adoption of renewable energy technologies by households is a key component of decarbonization and energy transition goals. Although existing literature has examined how sociodemographic characteristics, “green” preferences, and peer effects impact adoption of new energy technology, the role of behavioral preferences has not been adequately studied. In this paper, we examine the effect of two types of behavioral preferences, namely the degree of risk tolerance (risk preference) and attitude toward delayed reward (time preference) on the contract decision to lease or own a solar photovoltaic (PV) system. We develop a theoretical framework to show that the effect of risk and time preferences on the relative utilities from the two contracts is monotonic: Lower risk aversion and lower discount rate (more patience) imply a higher chance of solar PV ownership. To test these predictions empirically, we first estimate preference parameters (risk aversion and discount rate) from laboratory data collected from solar PV adopters. We then combine the parameter estimates with data on actual solar PV contract choice to examine the relationship between solar PV adopters' time and risk preferences and their lease‐versus‐own choice. Our regression results confirm that less risk averse individuals have a higher tendency to choose the ownership option, whereas more patient individuals are (weakly) more likely to own their solar PV systems. These findings contribute to a greater understanding of the role of behavioral factors in household decisions related to energy technologies.

Revenue-sharing vs. cost-sharing contracts in motivating supplier corporate social responsibility

PurposeTo motivate the supplier to exert more corporate social responsibility (CSR) effort, the manufacturer offers it either a revenue sharing contract or a cost sharing contract. We study the contract choice of the manufacturer.Design/methodology/approachWe develop game theoretic models to investigate the manufacturer’s optimal contract choice and examine whether there is a conflict of contract preference between the manufacturer and the supplier.FindingsFirst, the revenue sharing contract has more strict conditions regarding the unit cost of the supplier’s CSR effort and the manufacturer’s retail price. Second, the cost sharing contract enables the manufacturer to achieve a “win-win” performance in terms of both profitability and CSR effort. Finally, the supplier prefers the cost sharing contract when the manufacturer’s price is low, otherwise, it prefers the revenue sharing contract.Originality/valueDiffering from the papers on CSR, our paper focuses on the supplier CSR management problem, and analyzes the optimal contract to motivate the supplier to exert more CSR effort.

A powerful local government's optimal discretion in simple menu contract of monopoly regulation

We analyse the optimal discretion of a powerful local government (LG) in deciding the instrument choice and setting standards of simple menu contracts (composed of a fixed price and a cost reimbursement) of monopoly regulation. Between the two, a fixed-price contract entails more incentives for efficiency than a cost-reimbursement contract, but ensures more profits for the firm. Due to a preference bias towards the firm's benefits between governments, an incentive reward, offered by the federal government (FG) to the powerful LG with informational advantage of efficiency gain from the regulation, is considered to induce an efficient regulatory policy. We find that under the FG's delegation mechanism, upper-level government conflict leads to a compromised policy as an exchange payoff and additional informational rent to the LG for part of their information value. For the remaining information, the reward is rejected, and the LG has the discretionary power to set policy criteria for simple contracts. The results suggest that bureaucratic political issues still lead to an excessive tendency towards either a fixed price or cost reimbursement scheme, depending on the bias direction of the LG's preferences regarding the monopoly. However, the delegation mechanism of hierarchical bureaucracy can effectively alleviate the influence of policy distortions caused by political factors.

Social capital, government guidance and contract choice in agricultural land transfer.

This study explores the impact of farm households' social capital characteristics and local government policies on the selection of farmland transfer contracts in China's rural industrial revitalization context. Utilizing field research data from 1,979 households in ethnic areas of Hunan Province, this paper constructs an econometric model to assess how farm households' social capital and local governments' involvement in rural industrial revitalization influence farmland transfer contract selections. The findings indicate that, lacking government program support, farmers' social capital significantly affects contract type and duration, but not the rent. Specifically, farmers possessing extensive social capital prefer verbal and short-term contracts (coefficients of 0.525 and 0.643, significant at the 5% level), whereas their influence on rent (coefficient of 2.418, significant at the 5% level) manifests under government program support. These results challenge the conventional theory of farmland transfer contracts and offer substantial empirical support for the development of local government policies in rural industrial revitalization, underlining the critical role of government guidance and social capital in enhancing farmland transfer.

The intrinsic value of decision rights: Field evidence from electricity contract choice automation

Previous laboratory evidence suggests that people tend to value their decision right beyond its instrumental value. We measure the intrinsic value of decision rights in the context of switching the electricity provider. We focus on customers of an online platform who can either choose a service that reminds them when they are allowed to switch their electricity contract or a service that automatically switches the contract on their behalf whenever possible. Our focus is on the intrinsic value of decision rights as a potential obstacle of this choice automation. Surprisingly, we find that customers who make use of the automation service assign significantly higher intrinsic value to their decision rights, compared to those who opted for the mere reminder. Hence, there appears to be a connection between having a high intrinsic value of decision rights and the level of interest in attributes of the automation service under consideration. The positive correlation suggests that the widespread positive intrinsic value of decision rights and the future adoption of similar automation services and devices do not necessarily contradict each other.

Learning‐by‐doing and contract choice

AbstractThis study examines vertical agreements that occur when suppliers experience learning‐by‐doing, which makes them more productive over time and poses a competitive threat to their rivals. Consequently, a dominant supplier arranges payments that reference the rival good. This study contributes to the existing literature by showing that the dominant supplier chooses specific contracts to reap optimal benefit from its rival's efficiency gains. These contracts restrict the rival, harm consumers, and reduce welfare when the rival is exceptionally efficient or expects significant improvements through learning‐by‐doing. Therefore, this study emphasizes the significance of foreseeable innovations and their implications in antitrust proceedings.

Influences of Farmland Transfer Transaction Costs on Contract Choices from the Perspective of Differential Order Governance: Based on a Survey of Farmers in Henan Province

Under the heterogeneous situation of heterogeneity of farmland circulation entities, transaction costs are the key factors to optimize the selection of circulation contracts, and reducing transaction costs is an important realization path to promote farmland circulation in a reasonable and orderly manner and accelerate the process of agricultural modernization. Based on the survey data of 814 farming households in Henan Province, this study explores the transaction costs on contract selection based on the differential order governance. The results show that (a) in the transfer of farmland, farmers’ choice of contracts is restricted by their degree of association with the transaction entity, which is the result of differential order governance. (b) The influence of differential order governance on the selection of transfer contracts is constrained by the governance context. Farmers tend to choose formal written contracts in the context of weak ties governance but choose verbal or informal contracts under strong relationship governance. (c) The impact of transaction costs on the selection of farmland transfer contracts is constrained by the three-stage scenarios as before, during, and after the transaction. In different transaction stages, the higher the transaction costs are, the more likely farmers are to choose a formal written contract. The findings show the importance of the rules of human relations in the society of acquaintances in saving transaction costs. The importance of the formal system and informal institutions, such as trust and reputation, and avoiding one-size-fits-all suggestions should be involved in the formulation and implementation of farmland transfer policies.

Contractual forms of realization of property rights in the economic area

The article is devoted to the study of a contract as a legal form of realization of property rights in the economic sphere, considering theoretical and practical problems, in particular, the problem of contract selection, and the significance of the act of acceptance and transfer of property as a legal fact. The materials used for the study include legislative acts, scientific sources on commercial and civil law, case law on transfer of ownership, conclusion of contracts on behalf of a business entity with excess of authority, and the meaning of an act of acceptance and transfer as a transaction or evidence. The study consistently reveals the relationship of legal provisions to the economic function of law, analyses the concept, features and types of commercial contracts, names contracts, under which property is transferred to the ownership or temporary use of another entity, and analyses the legal provisions on the choice of contract and the owner's performance of contractual obligations. Based on the study, the author formulates a definition of an economic contract as a legal form of realization of property rights and identifies the characteristic features of such contracts. In particular, the author concludes that such contracts are the result of the exercise of the right to dispose of property and ensure the dynamics of property rights in the economic sphere. Based on the study of various approaches to the classification of economic contracts, the author concludes that all classifications of economic contracts include contracts for the transfer of property into ownership or use. Based on this conclusion, the author systematizes economic contracts, which mediate the realization of property rights. The author also analyzes and specifies the criteria for selecting a contract for exercising property rights in the economic sphere. The author argues that the obligation of a business entity to be the owner of property under a contract is terminated at the time of transfer of property and is mostly formalized by drawing up an act of acceptance and transfer of property. Such an act should be considered an element of the contract as a legal fact, and its legal significance lies in fixing the moment when the property owner's rights are terminated, unless another moment is established by law or contract

Contract Disclosure under External Scrutiny

ABSTRACT We examine the effects of mandating compensation disclosure on executive incentive contracts, earnings management, firm value, and social welfare. We develop a moral hazard model with multiple principal-agent pairs facing an external monitor who allocates resources across firms to verify earnings management. With such scrutiny allocation, contracts exhibit externalities that create a coordination problem among principals. Contract disclosure enables principals to design the contract anticipating the monitor’s reaction. However, it may also exacerbate the coordination problem among principals because they do not consider externalities on other principals caused by the effects of their contract choices on the monitor’s scrutiny allocation. If internal controls are relatively weak, contract disclosure may make contracts more strongly contingent on reported earnings, increase earnings manipulation, and nevertheless increase social welfare. Contract disclosure improves firm value only if the scrutiny resources available to the monitor are not strongly constrained. JEL Classifications: C72; D62; G38; M43; M46.

US federal government contracting for disaster management

AbstractDisasters affect hundreds of millions of people every year and the response of governments is crucial in alleviating the suffering of those affected. Despite the importance of contracting in response to disasters, research on this topic is conspicuous by its absence. This paper begins to address this gap by investigating the choice of procurement contract type by US federal agencies during disaster management operations. The research relies on 47,560 contracts issued by the US federal government in response to 14 major disasters between 2005 and 2016. We build on agency theory to investigate the choice of the contract type made by federal agencies at the different stages of a relief operation. This research provides empirical evidence of the key factors underpinning the choice of contract in the context of disaster management, namely the amount of spend per contract and the type of acquisition (product or service), and reveals the moderating role of the stage of the relief operation.

‘The same contract that is suitable for your Excellency’: Immigration and emulation in the adoption of sharecropping‐cum‐debt arrangements in Brazil (1835‒80)

AbstractThis paper studies the history of contractual choice in coffee plantations of São Paulo, Brazil. It focuses on the consolidation of non‐captive labour markets in the early phases of the transition from slavery in the country, particularly in the 1840s–50s. Vis‐à‐vis the alternatives of fixed rents and fixed payments per time worked or piece rates, the paper examines the rationale for the adoption of sharecropping arrangements with European bonded labourers. New archival evidence suggests that sharecropping had no obvious productivity advantage over alternative labour–rental arrangements in this period, and that the adoption of sharecropping arrangements resulted from the positional advantage of its first proposers, who influenced later choices of contractual design. A credit‐labour tie‐up long outlived the original sharecropping arrangements, in turn allowing for the immigration of poor and credit‐constrained Europeans, paving the way to insert Brazil into the circuits of mass migration without promoting institutional reforms to attract non‐bonded immigrants.

An evolutionary game theory-based study examining the relationship between fiscal policy, stability of farmers' cooperatives, and environmentally friendly digital management.

To increase the degree of implementation of the rural revitalization strategy, it is crucial to conduct a scientific investigation of the relationship between fiscal policy, fiscal decentralization, green digital management, and contract selection. This research develops an analytical framework for the application of fiscal policy and the choice of cooperative association contracts based on the contract theory. On the basis of a theoretical analysis of the external factors that influence the choice of residents' cooperative association contract and behavior, it goes on to investigate the interest game relationship and stability of three different cooperative associations (production type, service type, and industrial chain type). Additionally, it runs an empirical test using survey information from cooperative associations in China's Gansu Province. The findings indicate that the cooperative association is more likely to select the factor contract model depending on the strength of the fiscal policy support, the union's brand influence, and the regional market share change of the primary products. Evolutionary equilibrium is inhibited by the association's input costs, but a stable contract is created more favorably the more average the cost distribution is. The stability of the contract and its detrimental effects on pro-environmental behavior are worse the more damage other residents' breaches of the contract have caused. The research findings in this paper may serve as a basis for decision-making and a source of information for encouraging the high-quality growth of cooperative groups.

벌크해운시장에서 용선계약유형 선정에 영향을 미치는 요인에 관한 연구

Purpose: This study provides to charter companies, including shippers, implications for charter party decision-making by identifying factors that affect the selection of contract types in the dry bulk shipping market.
 Research design, data, and methodology: For empirical analysis, the dependent variable was set as a choice between time charter and voyage charter, and the independent variables were set as company and cargo characteristic factors, company internal environmental change factors, and company external environmental change factors. A hypothesis test was conducted using 111 questionnaires.
 Results: Variables such as cargo volume and ship size were found to have a significant impact on the choice of charter contract. Company characteristics, investment propensity, and risk management factors were significant as a company's internal environmental factors. All variables, including market outlook, volatility, and cost factors, were statistically significant as a company's external environmental factors.
 Conclusions: Investment decisions and the outlook for future shipping market conditions are important factors to consider in decision-making as to the type of charter contract. Therefore, it is important for shippers as charters to obtain quick and accurate information on the shipping market.

Empirical analysis of network effects in nonlinear pricing data

Network effects, i.e., an agent's utility may depend on other agents' choices, appear in many contracting situations. Empirically assessing them faces two challenges: an endogeneity problem in contract choice and a reflection problem in network effects. This paper proposes a nonparametric approach to tackle both challenges by exploiting restriction conditions from both demand and supply sides. We illustrate our methodology in the yellow pages advertising industry. Using advertising purchases and nonlinear price schedules from seven directories in Toronto, we find positive network effects, which account for a substantial portion of the publisher's profit and businesses' surpluses. We finally conduct counterfactuals to assess the overall and distributional welfare effects of the nonlinear pricing scheme relative to an alternative linear pricing scheme with and without network effects.

The Impact of Rural Industrial Integration on Agricultural Green Productivity Based on the Contract Choice Perspective of Farmers

Promoting farmers’ participation in rural industrial integration and driving farmers’ agricultural production with cooperatives and agribusinesses are conducive to realizing cost saving, efficiency, and green production and guaranteeing food security and sustainable agricultural development. Based on the microsurvey data of 1039 grain farmers in Henan Province, China in 2022, this paper examined the impact of contractual choices of farmers’ participation in rural industrial integration on agricultural green productivity while analyzing the mechanism of action by using OLS regression, a causal mediation analysis of instrumental variables, propensity score matching, and two-stage least squares (2SLS). The study found that: (1) farmers’ participation in a contract, driven by cooperatives or agribusinesses to carry out agricultural production, is conducive to improving their agricultural green productivity, but the effect of each main body to drive farmers varies; (2) farmers’ participation in a contract, through cooperatives or agribusinesses to obtain all kinds of agricultural production services—such as agricultural machinery services, agricultural supply services, and technical guidance services—improves the use of agricultural machinery, the standardization of chemical fertilizers, pesticides, and other agricultural materials’ use, increases technical guidance, and improves agricultural green productivity. The findings of this paper suggest policy and practical implications for safeguarding food security and promoting sustainable agriculture, as well as enriching research on agricultural productivity.

Consumer Jurisdiction and Choice of Law Rules in European and Chinese Private International Law

This article compares consumer jurisdiction and choice of law issues in China and the EU. It aims to answer the following questions. What is the notion of consumer? Are farmers, package travel tourists and timeshare tourists consumers? Are dual-purpose contracts consumer contracts? Is a consumer jurisdiction rule needed in China and if yes, under what ground and with what conditions? Is choice of court agreement in consumer contracts valid? How to limit the exercise of party autonomy and what role mandatory provisions may play? Shall consumer contract and tort claims be subject to the same applicable law? Based on a comparative analysis with European law, this article concludes that to improve cross-border consumer protection, China should reform its law to include package travel contracts and timeshare contracts into consumer contracts and determine the nature of dual-purpose contracts pursuant to their primary purpose. Moreover, the current limitation on party autonomy should be lifted by providing freedom to both parties and relying on mandatory provisions as a safety valve. The consumer choice of law rule and its interaction with the general contract choice of law and tort choice of law rule needs to be reexamined.

Market Risk Management with Equity Derivatives

This case delves into market risk management in an initial public offering (IPO) investment arising due to the unexpected onset of the pandemic. The protagonist in the case is overwhelmed by the euphoria surrounding the IPO issue of SBI Cards and turns into a speculator instead of a normal investor. He makes a leveraged bet on the likely listing gains by resorting to IPO funding. After the closure of the IPO issue, the market registered very sharp declines due to a viral fever engulfing the whole world. Now, the protagonist, who has already lost heavily from the existing portfolio, has to encounter likely losses from the loan-funded IPO investment. He had to hedge the likely losses from the possible listing day losses from the IPO. For this, he needs to put in place a hedging strategy, answering the questions on the choice of derivative contract, size and expiry date of the contract.