Implicit Contracts Research Articles

Cash Balance Pension Plan Conversions: An Analysis Of Motivations And Pension Costs

In recent years, many corporations have replaced their traditional defined benefit (DB) pension plans with cash balance (CB) plans, which share many of the characteristics of defined contribution plans. This study provides empirical evidence on the characteristics of CB converters and the behavior of pension costs and obligations pre- and post-conversion. We find that CB converters are larger than firms that retain traditional DB plans as well as those that terminate DB plans. They are less profitable than the former, but more profitable than the latter. CB conversions are not associated with proxies for greater labor mobility (e.g., firm-specific employee turnover rate). They are associated with a workforce that is closer to retirement, on average, lending credence to the breach of implicit contract rather than the labor market hypothesis as a motivator of CB conversions. Consistent with this intuition, we document that CB converters recognize a reduction of unrecognized prior service costs in the year of conversion, consistent with a negative plan amendment. Unlike pre-conversion, pension costs and obligations are significantly lower for CB firms post-conversion than for a matched sample of firms retaining traditional DB plans. CB conversions are more popular than DB plan terminations among firms with overfunded pension plans in periods when expected return on plan assets is likely to be high, with a consequent positive effect on reported income.

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BOOK REVIEWS

Morale and Discipline in a Multiethnic Army: The Indian Army in Mesopotamia (1914–1917)

This article examines morale and discipline in Britain's Indian Army during the First World War in Mesopotamia. It argues that logistical failure, heavy casualties, and the necessity of fighting an Islamic enemy placed severe stress on the implicit contract between Indian soldiers and the army's command structure in the opening years of the conflict. By 1916, an increasing number of Indians resorted to desertion and even suicide in order to escape service. Indian morale improved in 1917 in part because Britain devoted increased resources to the campaign in Mesopotamia, but also because British political and military leaders made a concerted effort to honor the terms of the implicit contract, which included the maintenance of ethnically homogenous units led by British officers with highly specialized linguistic skills and cultural knowledge. In addition to shedding new light on the First World War in Mesopotamia, the article offers insights into the challenges facing modern multiethnic armed forces.

Explicit versus implicit contracts for dividing the benefits of cooperation

Experimental evidence has accumulated highlighting the limitations of formal and explicit contracts in certain situations, and has identified environments in which informal and implicit contracts are more efficient. This paper documents the superior performance of explicit over implicit contracts in a new partnership environment in which both contracting parties must incur effort to generate a joint surplus, and one (“strong”) agent controls the surplus division. In the treatment in which the strong agent makes a non-binding, cheap talk “bonus” offer to the weak agent, this unenforceable promise doubles the rate of joint high effort compared to a baseline with no promise. The strong agents most frequently offered to split the gains of the high effort equally, but actually delivered this amount only about one-quarter of the time. An explicit and enforceable contract offer performs substantially better, increasing the frequency of the most efficient outcome by over 200% relative to the baseline.

Information Flows in Mutual Fund Families

Using a dataset of managers in fund families that offer affiliated funds of mutual funds (AFoMFs), I explore information flows in mutual fund families. I first show that AFoMFs allocate more capital to socially connected funds in the family. I then provide evidence that this investment behavior is information-driven. AFoMF managers increase (decrease) connected fund holdings that subsequently provide positive (negative) abnormal returns, thereby utilizing social connections to extract private information. Finally, I show that, in return for information sharing, AFoMF managers provide liquidity subsidization to connected, distressed funds, suggesting that an implicit contract equilibrium may exist.

Wages, implicit contracts, and the business cycle: Evidence from a European panel

We study the joint behavior of hours and wages over the business cycle in a unique panel of 13 European countries, and document significant history dependence in wages. Workers who experience favorable market conditions during their tenure on the job have higher wages, and work fewer labor hours. Unobserved differences in productivity, such as varying job quality, or match-specific productivity are not likely to explain this variation. The results instead point to the importance of contractual arrangements in wage determination. In economies with decentralized bargaining practices, such arrangements resemble self-enforcing insurance contracts with one-sided commitment (by the employer). On the other hand, in countries with strong unions and centralized wage bargaining, wage behavior is better approximated by full-commitment insurance contracts. The co-movement of hours and wages further confirms a contractual framework with variable worker hours. Despite the strong prevalence of contracts in Europe, however, the elasticity of labor supply is considerably smaller compared to the U.S. labor market.

Raising the Euro’s Inflation Target without an Inflationary Default

To raise the euro’s inflation target without an inflationary default and meanwhile to promote growth and the realignment of the relative prices and wages between countries, two other heterodox actions are necessary: the substitution of previously issued bonds by new ones with higher denominated nominal rates of interest and to coordinate the countries in regard to rules to readjust some other (implicit and explicit) contracts impacted by the surprise. I specifically discuss the case of wages.

Organizational Authenticity during Post-Merger Integration, Employee Productivity and Performance

Organizational authenticity—consistency between a firm’s espoused values and realized practices—constitutes an implicit contract between the firm and its employees. We argue that implicit contract ...

Social Policy in the European Public Opinion: An Implicit Contract between State and Society

Using the cross-country ESS (2008) data file, the author explores welfare attitudes of population of European countries, the demand for social policy, the willingness to participate in its financing, and the difference between these two parameters. The paper argues that expectations associated with social policy and willingness to accept higher taxation in order to receive more benefits as well as the gap between these two depend on institutional characteristics of the countries that constitute the factors of fiscal illusion. Poor institutions and the lack of transparency in fiscal and social policies feed corruption and fiscal illusion, therefore generating misperceptions and free rider behavior.

Information or Insurance? On the Role of Loan Officer Discretion in Credit Assessment

We employ a unique dataset of credit assessments for 3,756 small businesses by nine banks using an identical rating model to examine (i) to what extent loan officers use their discretion to smooth credit ratings of their clients, and (ii) to assess whether this use of discretion is driven by information about the creditworthiness of the borrower or by the insurance of clients against fluctuations in lending conditions. Our results show that loan officers make extensive use of their discretion to smooth clients' credit ratings: One in five rating shocks induced by changes in the quantitative assessment of a client is reversed by the loan officer, independent of whether the borrower experiences a positive or a negative rating shock. We find that this smoothing of credit ratings is hardly driven by soft information: Loan officers are just as likely to smooth persistent and market-related shocks as they are to smooth temporary and firm-specific shocks. We do find that loan officers are more likely to smooth ratings at banks where interest rates are more risk-sensitive. However, this behavior is not purely driven by an implicit insurance contract between loan officers and their clients. Instead, the use of discretion by loan officers seems at least partly driven by their reluctance to communicate price changes: Within banks loan officers are not more likely to smooth rating changes which lead to the strongest interest rate changes.

Relational Political Contribution Under Common Agency

Motivated by commitment problems of contracts in lobbying, this paper studies a model of a repeated common agency where monetary transfers must be voluntary. First, we show that the optimal punishment strategy for a principal takes a two-phase scheme, which is similar to the punishment characterized by Goldlucke and Kranz (2012). Second, we investigate whether an outcome of standard menu auctions with binding contracts can be supported by implicit contracts. We define the environment to be more preference-diverse if an efficient decision is less attractive to each principal. We show that the discount factor must be high to support the outcome of the standard menu auction if the environment is preference-diversified.

The Interaction of Explicit and Implicit Contracts: A Signaling Approach

We analyze the interaction of explicit and implicit contracts in a model with sel fish and fair principals. Fair principals are willing to honor implicit agreements, whereas sel fish principals are not. Principals are privately informed about their types. We investigate a separating equilibrium in which principals reveal their type through the contract o er to the agent. If this equilibrium is played, explicit and implicit contracts are substitutes. Since the agent learns the principal's type, a sel fish principal has to rely on explicit incentives. A fair principal, by contrast, can eff ectively induce implicit incentives and hence does not need to use explicit incentives. Interestingly, if a sel fish principal can rely on more e ffective explicit incentives, a fair principal becomes more likely to be able to separate from the selfi sh type and, hence, to make better use of implicit incentives. In this sense, there is a strategic complementarity between explicit and implicit incentives.

A study on the antecedents of supplier commitment in support of logistics operations

Supplier inputs need to be delivered at the right time in the right quality and quantity to fully satisfy the operations requirements of buying firms. In achieving these performance goals, the importance of supplier commitment in managing the buyer-supplier relationship (BSR) should not be neglected in logistics operations. Due to organisational differences on operations priorities, it is a challenging task to manage a BSR which is inherently complex with many transactional and institutional aspects involved. This challenge is salient in logistics management with multiple upstream and downstream parties involved where the lack of concerted efforts can compromise performance of the entire logistics chain. For many enterprises, it remains unclear on how to nurture supplier commitment in support of their logistics operations. Considering this research void, we examine the antecedents of supplier commitment covering both transactional and institutional factors influencing supplier commitment in the BSR. Survey data collected from 358 suppliers of an international buying firm indicate that business uncertainty discourages supplier commitment, but the commitment can be reinforced with both explicit and implicit contracts used for governing the BSR.

Earnings Losses after Non-Employment Increase with Age

This paper shows that after older workers experience periods of non-employment, earnings losses increase. Before non-employment, older employees have relatively higher earnings compared to younger employees without employment interruptions. This earnings advantage turns into a strong earnings disadvantage shortly before, and for a long time after, unemployment. Younger people who lose their jobs have a relatively stable, small earnings disadvantage before non-employment and quickly earn more than those without employment interruptions. The earnings effect of returning to the same employer after non-employment suggests that more involuntary work interruptions for older employees better explains the results than the loss of an implicit contract or specific human capital.

Inflation Risk and Real Corporate Governance

Purpose: To detect how inflation impacts on economic margins and cash flows, so modifying the relationship among different stakeholders and the nexus of their explicit or implicit contracts. Proper inflation detection is a prerequisite for effective contracting and corporate governance modelling, so as to preserve stakeholder value even in real (deflated) terms.Design/methodology/approach: This paper examines how inflation, linked to other macroeconomic variables, such as interest or currency rates, can affect the company’s operating margins and cash flows, so modifying the equilibriums among different stakeholders. Findings: Inflation has a deep impact on operating leverage and cash flows, affecting with its volatility the risky cost of collected capital. Inflation risk stands out as a powerful, albeit often unperceived, stakeholder wealth redistributor.Research limitations: Macroeconomic causes and implications of inflation are just summarized, as well as price level deviations and implications for specific industries, to be customized case after case.Practical implications: Inflation may not always be a zero sum game, with compensating winners and losers. Prompt monitoring and resilient contractual design ease inflation risk detection and mitigation, together with proper and flexible financial modelling. Originality/value: Inflation and corporate governance are seldom considered as linked issues; the impact of inflation on economic margins and financial flows, which represent the company’s strategic key parameters, is originally presented in an intuitive and practical way.

The effects of implicit contracts on wages: Evidence from the Japanese labor market

This paper tests whether wages in Japan’s labor market are determined by current or past labor market conditions. The empirical results are consistent with a model suggesting that labor market mobility may be limited and costly in Japan for men.

GPU-Based Interactive Cut-Surface Extraction From High-Order Finite Element Fields

We present a GPU-based ray-tracing system for the accurate and interactive visualization of cut-surfaces through 3D simulations of physical processes created from spectral/hp high-order finite element methods. When used by the numerical analyst to debug the solver, the ability for the imagery to precisely reflect the data is critical. In practice, the investigator interactively selects from a palette of visualization tools to construct a scene that can answer a query of the data. This is effective as long as the implicit contract of image quality between the individual and the visualization system is upheld. OpenGL rendering of scientific visualizations has worked remarkably well for exploratory visualization for most solver results. This is due to the consistency between the use of first-order representations in the simulation and the linear assumptions inherent in OpenGL (planar fragments and color-space interpolation). Unfortunately, the contract is broken when the solver discretization is of higher-order. There have been attempts to mitigate this through the use of spatial adaptation and/or texture mapping. These methods do a better job of approximating what the imagery should be but are not exact and tend to be view-dependent. This paper introduces new rendering mechanisms that specifically deal with the kinds of native data generated by high-order finite element solvers. The exploratory visualization tools are reassessed and cast in this system with the focus on image accuracy. This is accomplished in a GPU setting to ensure interactivity.

“You Promise Well and Perform as Badly:” The Failure of the “Implicit Contract of Family” in the Scottish Atlantic

“You Promise Well and Perform as Badly:” The Failure of the “Implicit Contract of Family” in the Scottish Atlantic

A contract reconsidered? Changes in the Swedish state's relation to the sports movement

This article concerns the relation between the state and the sports movement in Sweden. First, a theoretical model is presented for understanding and analysing the relation of the state to voluntarily organized sport. This model takes its starting point in administrative studies and modern political philosophy. Thereafter follows a general description of state support to sports in Sweden in the twentieth century. In this section the concept of an ‘implicit contract’ is used to show how the incompatible interests of the state and the sports movement have been solved in practice within the framework of Swedish welfare politics. The article ends with a discussion on whether current changes in government sport policy may lead to a reconsideration of the implicit contract between the state and the sports movement.

The Interaction of Implicit and Explicit Contracts in Construction and Procurement Contracting

Recent empirical work on construction and procurement contracting finds that repeated interaction leads toward use of lower powered explicit contracts (e.g., cost-plus contracts instead of fixed-price [FP] contracts). I present a theoretical model of construction and procurement contracting that captures the trade-off between the flexibility of cost-plus contracts and the high-powered incentives of FP contracts. I then analyze the effect of implicit contracting supported by repeated interaction on explicit contract choice to demonstrate a rigorous intuition for this empirical finding. The Author 2011. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.