Simple Contract Research Articles

Standard Breach Remedies, Quality Thresholds, and Cooperative Investments

When investments are nonverifiable, inducing cooperative investments with simple contracts may not be as difficult as previously thought. Indeed, modeling “expectation damages” close to legal practice, we show that the commonly applied remedy of US contract law induces the first best. Yet, to lower informational requirements of courts, parties may opt for a “specific performance” regime, which grants the breached-against buyer an option to choose “restitution” if the tender's value falls below some (arbitrarily chosen) quality threshold. To implement this regime, no more information needs to be verifiable than is implicitly assumed in Che and Hausch (1999. “Cooperative Investments and the Value of Contracting,” 89 American Economic Review 125–47). (JEL K12, L22, J41, C70)

Quick Response and Retailer Effort

The benefits of supply chain innovations such as quick response (QR) have been extensively investigated. This paper highlights a potentially damaging impact of QR on retailer effort. By lowering downstream inventories, QR may compromise retailer incentives to exert sales effort on a manufacturer's product and may lead instead to greater sales effort on a competing product. Manufacturer-initiated quick response can therefore backfire, leading to lower sales of the manufacturer's product and, in some cases, to higher sales of a competing product. Evidence from case studies and interviews shows that some manufacturers view high retailer inventory as a means of increasing retailer commitment (“a loaded customer is a loyal customer”). By implication, manufacturers should recognize the effect we highlight in this paper: the potential of QR to lessen retailer sales effort. We show that relatively simple distribution contracts such as minimum-take contracts, advance-purchase discounts, and exclusive dealing, when adopted in conjunction with QR, can remedy the distortionary impact of QR on retailers' incentives. In two recent antitrust cases we find evidence that, consistent with our theory, manufacturers adopted exclusive dealing at almost the same time that they were making QR-type supply chain improvements.

Pension Fund Design under Long-term Fairness Constraints

We consider optimal portfolio insurance for a mutually owned with-profits pension fund. First, intergenerational fairness is imposed by requiring that the pension fund is driven towards a steady state. Subject to this condition the optimal asset allocation is identified among the class of constant proportion portfolio insurance strategies by maximising expected power utility of the benefit. For a simple contract approximate analytical results are available and accurate, whereas for a more involved contract Monte Carlo methods must be applied to pick out the best design. The main insights are (i) aggressive investment strategies are disastrous for the clients; (ii) in most cases it is optimal to gear the bonus reserve; and (iii) the results are far less sensitive to the agent's risk aversion than in the classical case of Merton (1969), and as opposed to Merton horizon matters even with constant investment opportunities (because of the serial dependence between bonuses).

Asymmetric Information and Enforcement in Supply Contract Design

This paper studies a supply contracting problem where a buyer sources a product from a supplier to satisfy uncertain market demand. With the increasing length and complexity of today's global supply chains, the buyer may face two issues when designing the supply contract: adverse selection (i.e., the supplier's cost structure is private information) and lack of enforcement (i.e., the supplier's capacity investment is not enforceable). We derive the buyer's optimal contracting strategies and analyze their properties. We find that although the buyer's optimal mechanism is generally complex, it may reduce to a two-part tariff under certain conditions (i.e., a single, linear contract could be optimal for the buyer). Even when the two-part tariff is suboptimal, it performs nearly as well as the optimal mechanism for a wide range of situations. These findings indicate that the value of achieving enforceability and the value of using complex menu are negligible in such a supply chain setting. Therefore, our research demonstrates that the two-part tariff is an attractive option for buyers whose goal is to ensure supply while facing both cost uncertainty and enforcement issues. It also provides a new explanation for the prevalence of such simple contracts in practice.

Externality of contracts on supply chains with two suppliers and a common retailer

This paper addresses the impact of different contracts on supply chains withdifferent suppliers and a common retailer. Especially, we consider a supplychain system consists of a retailer and two suppliers (supplier1 andsupplier 2 and the supply chain consisting of supplier $i$ ($i = 1,2)$andthe retailer is named supply chain $i$ ($i = 1,2)$for simplicity) in whichsupplier 1 and the retailer agree to simple wholesale price contract andsupplier 2 and the retailer agree to revenue sharing contract. The productsprovided by these two suppliers are complement or substitution. We study theexternal effect of these two contracts. The main findings of this study areas follows: When the two products are not independent, the design of acoordinative contract depends the stocking quantity of another product;Under the same external conditions, both simple wholesale price contract andrevenue sharing contract perform the same when the products are complement,and revenue sharing contract performs better than simple wholesale pricecontract when the products are substitutive or independent; we can alsodesign a wholesale price contract and a revenue sharing contract whichcoordinate these two supply chains simultaneously when the products arecomplement. Moreover, we consider the case that the demand depends on costlyretailer's effort. We show that wholesale price contract always distorts theretailer's decision on effort in supply chain 1 and we can design a revenuesharing contract coordinating supply chain 2. Whether wholesale pricecontract or revenue sharing contract is more incentive to encourageretailer's promotion effort depends on the problem and contract parameters.These findings are different from the well known properties of these twocontracts in a supply chain consisting of 1-supplier and 1-retailer. Asretailers always sell multi-items in reality, we believe that our findingscould help managers manage channels efficiently.

On and Off Contract Remedies Inducing Cooperative Investments

A party dissatisfied with the contractual performance of a counterparty is typically able to pursue a variety of legal recourses. Within this apparent variety lurk two fundamental alternatives. The aggrieved party may (i) “affirm” the contract and seek money damages or specific performance; or (ii) “disaffirm” the contract with the remedy of rescission and restitution. This simple dichotomy of contract remedies applies broadly in both common law and civil law practice. We show here that this remedial regime allows parties to write simple contracts that induce first-best cooperative investments.

CASE REPORT: RECIDIVA PELVICA DI ETP RETTO CON INFILTRAZIONE URETERALE, TRATTAMENTO E FOLLOW-UP

Introduction: The authors present the clinical case of woman subjected to anterior resection of the rectum with recurrence involving the pelvic the right ureter occurred after about 8 years from surgery. Patients and methods: M.R. woman of 79 years, came to our observation for pain type sciatica. The patient has history of resection front of the rectum for adenocarcinoma (T3N1Mx, G2) carried out 8 years first with 5-year follow-up negative for recurrent disease. The Rx lumbosacral spine was negative, while the ultrasound of the abdomen showed an hydronephrosis second degree dependent on the right kidney. Yes therefore performs CT abdomen demonstrating a level sacral promontory solid education with diameter of 30 mm, inhomogeneous density for nodular calcification, which is located between the common iliac arteries and infiltration of the right ureter, which appears stenosis, upstream of the stenosis, there are signs of uretero-hydronephrosis. Outcomes of resection of the rectum without evidence of loco-regional recurrence or of iliac lymphadenopathy. The tumor markers are in normal limits. Assuming radical treatment you Exploratory laparotomy: for the small pelvis is neoformation of about 5 cm in diameter invading the distal right ureter and ileal loop. Proceed to resection stretch of ureter infiltrated by the tumor and practiced direct suture catheter type on pig-tail. Also practiced resection involved in the neoplastic process of the loop ileal. Not possible remove the entire tumor infiltrating the plan because sacral. The post-operative care is regular, the patient is resigned in XII postoperative day. Histopathological examination identifies the lesion as relapse of adenocarcinoma of the large intestine. Results: The follow-up at 12 months is negative for disease progression. Conclusion: Colorectal tumors in advanced stage (upper stage C2, III) even after treatment of resection and adjuvant chemotherapy regional recurrences may spot the medium to long term no increase in common biohumoral Markes. These recurrences may affect the urinary system requiring treatment diligent in order to prevent permanent kidney damage. Strategies therapeutic present in clinical setting and in the literature are numerous and vary depending on the extension of recidivism. They range from simple derivatives contracts (nephropielostomy), the resection-anastomosis of ureter involved, the en bloc resection recurrence of the mass, the debulking, the pelvic exenteratio.

Optimal financial contracts with hidden effort, unobservable profits and endogenous costs of effort

This paper studies financial contracting in a two-period financing model with double moral hazard, as entrepreneurial effort choices and profits are unobservable and non-verifiable. The optimal financial contract must induce both the high effort level and truthful revelation of profits. The paper further analyses the structure of the optimal contract where the entrepreneur's payoff takes a general functional form that allows for endogenously determined costs of effort. The entrepreneur's performance is influenced by not only extrinsic work motivation factors but also intrinsic factors so that the degree of control imposed by the investor, in the form of end-of-period transfers, affects the entrepreneur's costs of effort. The finding shows that under well-defined conditions, the optimal contract that solves a model with non-verifiable profits also elicits effort, and generally resembles a simple debt contract. The structure of the optimal contract is robust in the general case where the entrepreneur's payoff function is non-linear in transfers.

Two-Sided Informational Asymmetry, Bilateral Selfish Investment, Simple Incomplete Contract and the Legal Remedies

In this paper, a setting of bilateral selfish reliance investments and post contractual two-sided asymmetric information is explored. Since the pioneering work of Rogerson (1992) and Hermalin-Katz (1993), it is by now well known that the comprehensive contracts can implement the first best even if the parties' valuations are private information and reliance investments are of selfish types (with quasi-linear utilities). However, surprisingly real world contracts seem to be rather simple. Most often parties come up with fixed-price incomplete contracts which are generally renegotiated later (if not prohibited by court). Hence, it is an interesting to analyse whether breach remedies can introduce the first best in this set-up. Some interestingly results are obtained: Both the parties tend to over-invest both under Reliance damage and Restitution (i.e. no-damage) damage remedies. Courts usually adopt two disctinct methods - subjective and objective valuation - to establish breach - victim's expectation interest under asymmetric information. I conclude that the performance of expectation damages falls short of what party-designed liquidated damage could achieve; however, first best is generally not achievable.

Expectation Damages, Divisible Contracts, and Bilateral Investment

This paper examines the efficiency of expectation damages as a breach remedy in a bilateral trade setting with renegotiation and relationship-specific investment by the buyer and the seller. As demonstrated by Edlin and Reichelstein (1996), no contract that specifies only a fixed quantity and a fixed per-unit price can induce efficient investment if marginal cost is constant and deterministic. We show that this result does not extend to more general payoff functions. If both parties face the risk of breaching, the first best becomes attainable with a simple price-quantity contract. (JEL D86, K12)

The ownership of ratings

We identify the optimal contract between a rating agency and a firm and the circumstances under which simple ownership contracts implement this optimal solution. We assume that the decision to obtain a rating is endogenous and the price of a rating is a strategic variable. Clients hiding their ratings can be an equilibrium only if they are ex ante uncertain of their quality and if the hiring decision is not observable. For some distribution functions, a competitive rating market is necessary for this result to obtain. In this context, competition between rating intermediaries will lead to less information in equilibrium.

Service Outsourcing: Capacity, Quality and Correlated Costs

This paper studies how to design service outsourcing contracts to ensure fast, quality services from an independent service provider. The outsourcer does not have perfect information about either the service provider's capacity cost (i.e., cost for providing fast service), or her quality cost (i.e., cost of achieving a high quality level). Moreover, the two unknown costs may be correlated with each other. We solve for the outsourcer's optimal outsourcing contract, and show that the structure of the optimal contract depends on the relationship between the costs. Specifically, we highlight the following observations when the two costs are negatively correlated: First, under certain conditions, the outsourcer may be able to squeeze the supplier's profit (information rent) to zero for an intermediate range of cost realizations; second, it is possible that the service supply chain is coordinated by using the outsourcer's optimal contract. We then examine the performance of two classes of commonly observed contracts that are relatively simple to implement. It has been found that these simple contracts generally perform well when the costs are positively correlated, but they could perform much worse when the costs are negatively correlated. Our results therefore caution outsourcing companies that the potential trade-off between capacity cost and quality cost may require a careful design of outsourcing contracts.

Effects of sourcing structure on performance in a multiple-product assemble-to-order supply chain

Abstract This paper addresses the strategic pricing decisions of a decentralized assemble-to-order system, and the effects of sourcing structure on system performance. We consider an assemble-to-order system consisting of two substitute products and three components manufactured by different suppliers. Demand for the products is price-sensitive. The selling prices for the products are jointly determined by firms in the system. We study the system under both centralized and decentralized decision-making situations. For the centralized system, we demonstrate that there exists a unique optimal pricing solution. For the decentralized system, we show that there exists a unique Nash equilibrium in the players’ pricing game. We further analyze the effects of different sourcing structures on the system performance and the assembler’s performance. We find that reduction of suppliers in the system does not guarantee improvement of system performance. Different sourcing structures have different impacts on performance. When the two dedicated components are sourced from a single supplier and the common component is sourced from another independent supplier, the system and the assembler’s performance become worse. We show that the decentralized system can be effectively coordinated and the system performance can be improved with a simple profit-sharing contract. Finally, we provide comprehensive numerical examples to demonstrate some important managerial insights.

Lead-time reduction in a two-level supply chain: Non-cooperative equilibria vs. coordination with a profit-sharing contract

This paper considers game-theoretic models of lead-time reduction in a two-level supply chain involving a manufacturer and a retailer. The retailer manages her inventory system using the order quantity, reorder point, continuous-review ( q , r ) policy. To satisfy the retailer's order, the manufacturer sets up his facility, implements a pre-determined production schedule and delivers finished products to the retailer. In our paper, the lead-time consists of three components: setup time, production time and shipping time, each being in a range between minimum and “normal” durations. The first two lead-time components are naturally determined by the manufacturer, whereas the shipping lead time may be chosen by the manufacturer or the retailer. We thus consider two problems according to who decides the shipping lead time, and for each problems in the non-cooperative setting, we obtain Pareto-optimal Nash and Stackelberg equilibria. We find that, for all games, the manufacturer should be responsible for the setup time and production time at their normal durations. Next, we develop a simple profit-sharing contract to achieve supply chain coordination. We show that, under our properly designed contract, the two supply chain members are better off, and thus, they would have no incentive to deviate from the global solution that maximizes the system-wide profit.

Instruments of Concord: Making Peace and Settling Disputes Through a Notary in the City and <i>Contado</i> of Late Medieval Bologna

Notarial culture permeated all aspects of social life in late medieval Italy, including dispute settlement. This article examines the notarial acts produced to settle conflicts and make peace outside of a court in the city and countryside of Bologna. Through their offer of legal expertise and an array of contract options (namely, the instrumenta conpromissi transactionis, arbitrii, laudi, and pacis et concordie) notaries facilitated reconciliations made by private citizens and contadini as well as Bologna's signore, Taddeo Pepoli, and the men of his dominant Scacchese faction. The trail of contracts demonstrates how Taddeo Pepoli orchestrated his rise to power through peace acts and arbitrations, and after he was declared lord of his allies—university professors linked to him through marriage and Scaccese officials—continued as arbiters and hosts for peace acts. While the elite had arbitrators for political purposes, commoners and women used simple contracts without arbitration for family matters, often dowry and inheritance. The most common contract was the pax, which at times ended feuds and vendetta, but was more frequently used to release assailants from criminal bann after personal assault. Notaries—common witnesses and proxies for parties in all types of settlement—were essential components to power and justice.

Components, Contracts and Vocabularies - Making Dynamic Component Assemblies more Predictable.

Runtime verication is usually restricted to type checks. We propose a simple component contract language that is powerful enough to represent dierent types of complex contracts between collaborating components, including contracts with respect to component semantics and quality of service attributes, and contracts that refer to resources other than programing language artefacts. These contracts are based on a pluggable contract vocabulary and can then be used for runtime verication of assemblies. We present a proof of concept implementation of the contract language proposed for the OSGi/Eclipse component model.

VaR constrained hedging of fixed price load-following obligations in competitive electricity markets

Load serving entities providing electricity to regulated customers have an obligation to serve load that is subject to systematic and random fluctuations at fixed prices. In some jurisdictions like New Jersey, such obligations are auctioned off annually to third parties that commit to serve a fixed percentage of the fluctuating load at a fixed energy price. In either case the entity holding the load following obligation is exposed to the load variation and to a volatile wholesale spot market price which is correlated with the load level. Such double exposure to price and volume results in a net revenue exposure that is quadratic in price and cannot be adequately hedged with simple forward contracts whose payoff is linear in price. A fixed quantity forward contract cover, is likely to be short when the spot price is high and long when the spot price is low. In this paper we develop a self-financed hedging portfolio consisting of a risk free bond, a forward contract and a spectrum of call and put options with different strike prices. A popular portfolio design criterion is the maximization of expected hedged profits subject to a value at risk (VaR) constraint. Unfortunately, that criteria is difficult to implement directly due to the complicated form of the VaR constraint. We show, however, that under plausible distributional assumptions, the optimal VaR constrained portfolio is on the efficient mean-variance frontier. Hence, we propose an approximation method that restricts the search for the optimal VaR constrained portfolio to that efficient frontier. The proposed approach is particularly attractive when the mean-variance efficient frontier can be represented analytically, as is the case, when the load and logarithm of price follow a bivariate normal distribution. We illustrate the results with a numerical example.

Multi-Bank Loan Pool Contracts

We show that multi-bank loan pools improve the risk-return profile of regional banks' loan business. Banks write simple contracts on the proceeds from pooled loan portfolios, taking into account the agency problems in joint loan production. Thereby, banks benefit from diversifying credit risk while limiting the efficiency loss due to adverse incentives. We present empirical evidence that the formation of loan pools can reduce the volatility in default rates, proxying for credit risk, of participating banks' loan portfolios by roughly 70% in our sample. Under reasonable assumptions, the gain in return on equity (in certainty equivalent terms) is around 20 basis points annually.

Standard Breach Remedies, Quality Thresholds, and Cooperative Investments

When investments are non-verifiable, inducing cooperative investments with simple contracts may not be as difficult as previously thought. Indeed, modeling “expectation damages” close to legal practice, we show that the commonly applied remedy of US contract law induces the first best. Yet, in order to lower informational requirements of courts, parties may opt for a specific performance regime which grants the breached- against buyer an option to choose restitution if the tender’s value falls below some (arbitrarily chosen) quality threshold. In order to implement this regime, no more information needs to be verifiable than is implicitly assumed in Che and Hausch (1999).

Simple Efficient Contracts in Complex Environments

This paper studies a general model of holdup in a setting encompassing the models of Segal (1999) and Che and Hausch (1999) among others. It is shown that if renegotiation is modeled as an infinite-horizon noncooperative bargaining game, then, with a simple initial contract, an efficient equilibrium will generally exist. The contract is robust in the sense that it does not depend on fine details of the model. The contract gives authority to one party to set the terms of trade and gives the other party a nonexpiring option to trade at these terms. The difference from standard results arises because the initial contract ensures that the renegotiation game has multiple equilibria; the multiplicity of continuation equilibria can be used to enforce efficient investment.