Simple Contract Research Articles

Redesigning payments for ecosystem services to increase cost-effectiveness

Payments for Ecosystem Services (PES) are a widely used approach to incentivize conservation efforts such as avoided deforestation. Although PES effectiveness has received significant scholarly attention, how PES design modifications can improve program outcomes is less explored. We present findings from a randomized trial in Mexico that tested whether a PES contract that requires enrollees to enroll all of their forest is more effective than the traditional PES contract that allows them to choose which forest parcels to enroll. The modification’s aim is to prevent landowners from enrolling only parcels they planned to conserve anyway while leaving aside other parcels to deforest. We find that the full-enrollment treatment significantly reduces deforestation compared to the traditional contract (41% less deforestation; p = 0.01). As a result, cost-effectiveness of the PES program quadruples. This result highlights the potential to substantially improve the efficacy of conservation payments through simple contract modifications.

Pricing and collection decisions of a closed-loop supply chain with remanufacturing under reciprocal preferences

This paper examines the effects of reciprocal preferences on the performances of a closed-loop supply chains (CLSC) with remanufacturing. Specifically, we incorporate reciprocal preferences into a two-echelon CLSC in which the manufacturer collects used products and then remanufactures the other parts except for key components as well as producing new products, and must purchase such key components from the supplier. Using a supplier-led Stackelberg game framework, the models are constructed with and without reciprocity, and then the effects of reciprocity on channel efficiency, consumers, environment and society are examined. We show that, (i) if the supplier reciprocates, the collection rate, the CLSC’s total profit, the channel efficiency and the consumer surplus enhance. Additionally, if only the manufacturer reciprocates, the CLSC’s profit remains constant; (ii) under certain conditions, the reciprocal preferences of both channel members aggravate environmental impact, while benefit social welfare; (iii) Pareto improvement can be achieved if the reciprocity parameters of both channel members are relatively high, and a simple procurement price contract can conditionally coordinate the CLSC. Finally, two extensions are studied by considering consumer heterogeneity and solving a two-period game problem, and the results characterize how reciprocal behaviors drive the performances of channel members.

Optimal banking with delegated monitoring

We propose a model of financial intermediation based on delegated monitoring, where firms' returns are private information that lenders can ascertain through costly state verification. Our model has two key features: lenders cannot commit to their verification strategies and there are aggregate shocks. Simple debt contracts are Pareto optimal with or without intermediation. We show that the benefits of intermediation can be limited by financial instability in the presence of aggregate shocks. However, a well-designed resolution mechanism ensures the Pareto optimality of financial intermediation, and a bail-out policy can restore financial stability.

Can a Supplier’s Yield Risk Be Truthfully Communicated via Cheap Talk?

Problem definition: When a firm (buyer) outsources the production of a new product/component to a supplier subject to random yield, a major challenge is that the supplier’s yield is usually private information. In practice, yield information is often shared via nonbinding communication—for example, a supplier self-assessment report. We examine whether such communication can be truthful and credible. Methodology/results: We analyze a cheap-talk game in which, given a simple contract that specifies the prices for each unit ordered and for each effective unit delivered, the supplier first communicates its yield level, and then the buyer determines an order quantity. We prove that truthful communication can emerge in equilibrium. To do so, we first show that if knowing the supplier’s type, the buyer will either inflate or reduce the order quantity to cope with a lower yield, depending on the product’s market potential. Under asymmetric information, the supplier will truthfully communicate its type if (i) the buyer with a high market potential intends to inflate the order quantity for a lower yield, but the buyer with a low market potential prefers to do the reverse; and (ii) the supplier is uncertain about the product’s market potential, which is the buyer’s private information, and anticipates that a hard-to-make product is more likely to have a higher market potential. Managerial implications: Truthful cheap-talk communication can emerge in equilibrium when the product’s market size and yield are negatively correlated. Truthful communication always benefits the buyer and consumers and may benefit the supplier if the product has sufficient market potential and the supplier’s production cost is not too high. Moreover, the buyer can be better off paying more for the input quantity (although part of the output is defective) or paying a higher wholesale rate if the adjustment in payment terms enhances communication credibility. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2023.0089 .

Contracting when enforcement is weak: evidence from an audit study

Abstract How are contracts structured in the presence of relationship-specific investments when legal enforcement is weak? Using a new audit methodology, we show that simple financial contracts in combination with social norms and reputation concerns can sustain relationship-specific transactions. Wholesalers in the market for pens in India use upfront payments rather than increased risk premiums to mitigate risks arising from relationship-specific investments. Upfront payments for printed pens cover only 40 percent of the production costs, highlighting the importance of upfront payments as a screening device. Ex-post, renegotiation is more likely for printed pens, but in a substantial fraction of cases, renegotiation fails.

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.

Simple relational contracts and the dynamics of social capital

This article proposes a dynamic model to examine the structure of “simple” relational contracts, obeying realistic properties that can be easily understood and audited by both parties. In such relationships, the need to offer each supplier a large enough share of future business to deter cheating limits the number of relationships a buyer can sustain. Trade is thus restricted to durable relationships, a form of social capital. Nevertheless, exogenous stochastic shocks sometimes prevent suppliers from fulfilling their promises and relationships are constantly dissolving and later renewed. Moreover, the coming of a crisis, where stochastic shocks are more probable, can lead to the quick rupture of some relationships as there is less expected future business to incentivize all suppliers. New relationships can later be formed, but this takes time due to search frictions. This suggests new connections between the theory of relational contracting and the macroeconomic analysis of recessions.

Simple contracts with double-sided moral hazard and adverse selection

We examine a linear contract model involving a risk-neutral venture capitalist (VC) hiring a risk-averse manager to run a project. The project output is determined by the joint efforts of both parties, the manager’s private ability and a random shock. We explicitly derive a truth-telling menu of contracts, which explain that the incentives provided by VC increase with the manager’s ability, under the widely-recognized monotone hazard rate condition. The fixed compensation would be negative; thus, the manager provides a portion of the financial investment and shares risks with VC. VC’s contracts can not distinguish the types of managers in a range of low-ability managers, leading to a partially pooling equilibrium. Conversely, within a range of high-ability managers, VC’s contracts identify the types of managers, resulting in convex information rents that increase with abilities. We explicitly provide ability thresholds specifying partially or completely pooling and separating equilibrium.

Risk preferences, newsvendor orders and supply chain coordination using the Mean-CVaR model

The standard newsvendor model assumes that decision-makers in the supply chain are risk-neutral. This paper explores the newsvendor problem using risk measures building on the classical normative definition of risk preferences by certainty equivalents to model risk-averse, risk-neutral, and risk-taking decision-makers. We suggest the Mean-CVaR model based on the popular risk measures Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR). The objective function is characterized by a tolerance level differentiating between low and high profits and by a pessimism level representing the weight of low profits. For the first time, we prove that the optimal order quantity is higher (lower) than the risk-neutral order quantity if and only if the newsvendor is risk-taking (risk-averse). The equivalence of product-specific risk preferences and the size of the order quantity enables the determination of the Mean-CVaR parameters from given order quantities or from a target profit. Further, based on supply chain’s objective maximization criterion, we discuss supply chain coordination with Mean-CVaR decision-makers. We show that a simple wholesale price contract can coordinate the supplier–buyer supply chain and completely characterize the decision makers’ risk preferences under supply chain coordination. For example, if the coordinator (supplier) is risk-averse, a coordinating wholesale price exists for a less risk-averse buyer as well as for a risk-neutral and risk-taking buyer. We also determine the Mean-CVaR parameters if the coordinator specifies a target for the supply chain profit and the buyer communicates a target profit. In this case, the coordinating wholesale price depends on the ratio of the target profits and we show the impact on supply chain efficiency.

Reimagining real estate and facilities management outsourcing : A bp and JLL case study

In 2019 bp set out to renew its facilities and real estate contracts. What began as a typical request for proposal exercise turned into a complete reinvention of the bp workplace organisation. The team got a boost when Bernard Looney took the helm as bp’s Chief Executive Officer (CEO) in February 2020. Looney’s vision was the most far-reaching transformation in bp’s 112-year history: to transform bp from an international oil company to an integrated energy company by shifting bp’s focus from producing oil and gas resources to one that delivers energy solutions. bp’s ambition is to become a net-zero company by 2050 or sooner, and help the world get to net zero. bp’s workplace team accepted the challenge; the simple contract renewal they had started needed to be reimagined. This case study goes behind the scenes and shows how the parties pulled off what many in bp thought was impossible, especially in the middle of a pandemic when 100 per cent of the work had to be done virtually.

A structural analysis of simple contracts

This paper provides an econometric framework for analyzing two-period simple contracts where an agent chooses between a fixed-price option and a cost-reimbursement option provided by a principal in each contracting period. First, we propose a consistent procedure for testing the null hypothesis of a corresponding cost function being linear, which is widely assumed for tractability in the literature. Motivated by the rejection of such a null based on our empirical data, next we establish nonparametric identification, without restricting the cost function to be linear, for all model primitives conditioned on the agent exerting nonzero effort. These primitives include agent’s cost and disutility functions, distribution of agent efficiency type, and parameters that characterize agent’s bargaining power and intertemporal preference. Moreover, we propose a consistent procedure to implement the identification results for estimation. In our empirical study, we find strong evidence against linearity of the cost function. The importance of this empirical finding is further evidenced by a welfare analysis, which shows the welfare assessment to be sensitive to the specification of cost function.

Consumers’ Protection Under Murabahah Sale Contract

Murabahah is one of the contracts of sale of goods by a person to another under an agreement whereby the seller obliges himself to disclose to the buyer the cost of goods sold to the buyer, whether that is on a cash basis or deferred payment. The seller has to disclose to the buyer the margin of profit included in the sale price of goods agreed to be sold. It is a cost-plus markup sale, which is the ideal sale contract under Islamic Law. The basic theme of this research paper is to highlight the significance of the contract of Murabahah as a simple contract for the protection of consumers and not as a model of financing, which is prevalent in today’s Islamic banks. It aims to highlight its role in different types of sale contracts and its application to the sale of some major commodities. Both aspects of Murabahah, i.e., Murabahah as a simple sale contract for the protection of consumers and Murabahah financing, are discussed. The paper aims to explain how a simple Murabahah Contract protects the interest of consumers better than any other sale contract.

The wrong of mercenarism: a promissory account

The wrong of mercenarism: a promissory account

Assessing the Landscape Recovery Scheme in the UK: a Q methodology study in Yorkshire, UK

Embedded within the European Union’s Green Deal is a re-enforced scope to encourage farmers’ participation in primarily voluntary agri-environmental schemes. Although outside of the European Union, the newly announced agri-environment schemes in England mirror such a policy shift towards incentivising participation in order to delivery more and better climate public goods. Farmers’ viewpoints regarding such schemes and contracts are therefore important to examine as they should be main determinants of current and future enrolment. In this paper, upland Yorkshire farmers are asked to express their opinions for the landscape Recovery scheme that aims to encourage collaboration and achieve landscape-wide interventions to ensure lasting delivery of climate public goods. Viewpoints show a dichotomy between pragmatic and environmentally-conscious farmers with preferences leaning towards ‘broad and shallow’ schemes that would have simple contract requirements and only achieve marginal gainsin the delivery of agri-environmental climate public goods.

Information Aggregation via Contracting

ABSTRACTWhen a group of investors with dispersed private information jointly invest in a risky project, how should they divide the project's profit? We show that a simple contract dividing profits in proportion to investors' risk tolerances may facilitate information aggregation by altering investors' risk‐taking incentives when they decide on how investment strategies respond to private information. Our results provide a contracting‐based approach for information aggregation, which is an alternative to learning from endogenous market variables (e.g., prices) via contingent schedules as seen in well‐known rational expectations equilibrium models.

Simple contracts with double-sided moral hazard and adverse selection

Simple contracts with double-sided moral hazard and adverse selection

Joshi's external stabilization system fixator – A mini solution to avert major disabilities in hand injuries

Background: Fractures of hand bones are often considered minor injuries and treatment is either delayed or neglected. These fractures are usually treated conservatively that leaves behind a residual functional deficit. Surgical intervention should be considered for open, unstable, multiple, comminuted, or intra-articular fractures. Standard surgical treatment includes the use of K-wire, plate, or mini-screws which are associated with unsatisfactory results and high complication rates. Joint stiffness is a commonly reported complication with most of the existing devices used for hand bone fractures. There is a deficit of data pertaining to the effectiveness of Joshi's External Stabilization System (JESS) in avoiding joint stiffness. Joshi's external fixator is a reliable treatment of phalangeal and metacarpal fractures of the hand. It is an economical, simple, lightweight, and stable contract. Patients and Methods: We report a prospective cohort study of 30 patients of hand bone fracture, 10–60-year age range, treated by JESS. Functional evaluation was made using the Duncan et al. scoring. Results: The results recorded were excellent in 31.58% of cases, good in 42.11% of cases, fair in 21.05%, and poor in 5.26% of patients. Conclusion: JESS ex-fix for hand is a useful construct that allows early mobilization of nearby joints. It can be considered a suitable choice for the management of phalangeal and metacarpal fractures of hand to deliver good functional outcome.

For Better or Worst: The Social Bond of Hysterics on Strike

The social bond of the group or culture writ large, for both Freud and Lacan, is predicated on something that exceeds simple social convention, contract, or historical mode of production. This is evinced, for Freud, by his myth of the primal horde and his notion of how groups cohere through a vertical, fantasmatic identification with any given leader and their connection with the dead Father. For his part, Lacan generated his theory of the four discourses as a structural—and, indeed, more plausible—account of how social relations are impossible yet work nevertheless. He mapped these on the basis of what Freud called the impossible professions: education, governance, and psychoanalysis. For Lacan, these are what he calls discourses, particularly the university discourse (education), the master’s discourse (governing), the analyst’s discourse (psychoanalysis, transforming or revolutionizing), and, Lacan adds, the hysteric’s discourse (desiring and protesting). The latter’s innovative addition is what I explore in this paper: how the hysteric makes and breaks institutions with their desire by “going on a kind of strike.” The social bond, for Lacan, is demonstrated most dramatically by the hysteric on strike; as he says, “A strike is the most social thing there is in the whole world. It represents fabulous respect for the social bond.” Herein, I elucidate the discursive power of the hysteric’s social bond, and how it offers a more thoroughgoing way to think of horizontal solidarity as an alternative to Freud’s leader-led patriarchal civilization.

Pricing decisions for a social comparison product supply chain

As a natural psychological tendency of human beings, social comparison is pervasive among consumers. However, while plenty of literature studied the role of social comparison in affecting consumer psychology empirically, few focus on the problem of social comparison in supply chains. This paper proposes a modified utility model in which a consumer has an intrinsic and social value from the social-comparison products. Furthermore, the social value incorporates two different consumer psychologies from social comparison: the assimilate effect from upward comparison and the contrast effect from downward comparison. Based on this model, we derive the firm’s price decisions for a social-comparison product supply chain consisting of a manufacturer and a retailer under two cases, the centralized case and the decentralized case. We find several interesting patterns of consumers’ behavior in the presence of social comparison. We also find that when consumers are highly sensitive to social comparison, the supply chain can be coordinated spontaneously using a simple wholesale price contract. Moreover, even when consumers are not very sensitive to social comparison, the wholesale and retail prices in a decentralized supply chain will significantly reduce compared to those for non-social-comparison products — social comparison can mitigate the double marginalization effect. Also, we obtain some other interesting managerial insights. For instance, while social comparison always benefits the manufacturer, it benefits the retailer under certain conditions. This paper contributes to the behavioral operations management literature by first revealing a new mechanism that coordinates supply chains through consumer social comparison.

Disclosing products’ freshness level as a non-contractible quality: Optimal logistics service contracts in the fresh products supply chain

The growth of digital shopping for fresh products necessitates the provision of cold chain logistics services. The present study constructs an optimal control model to investigate how to incentivize logistics service providers’ efforts to preserve product freshness during transport. The freshness level constantly evolves, unobservable and unverifiable, and thus cannot be explicitly specified in the contract. We study a two-echelon supply chain consisting of a retailer and a logistics service provider. Our research aims to design a menu of contracts that will induce the logistics service provider to pick the actions desired by the retailer in the absence of information on product freshness. The results suggest that a flexible revenue-sharing policy is preferable, as it increases alignment on the target of delivering fresh products. It essentially coordinates the supply chain regardless of whether the retailer has sufficient oligopoly power to dictate sales prices. In contrast, a simple transfer payment contract and fixed lump-sum bonus policy are also useful for aligning the freshness-keeping action, but they rely on the retailer’s sufficient oligopoly power. The findings have managerial significance in decreasing the occurrence of customer complaints about product freshness. Retailers may be able to predict the regions that can offer a freshness guarantee.