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Incentive Constraints (incentive + constraint)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting100%

Selected Abstracts

Formal and Informal Risk Sharing in LDCs: Theory and Empirical Evidence

ECONOMETRICA, Issue 4 2008
Pierre Dubois
We develop and estimate a model of dynamic interactions in which commitment is limited and contracts are incomplete to explain the patterns of income and consumption growth in village economies of less developed countries. Households can insure each other through both formal contracts and informal agreements, that is, self-enforcing agreements specifying voluntary transfers. This theoretical setting nests the case of complete markets and the case where only informal agreements are available. We derive a system of nonlinear equations for income and consumption growth. A key prediction of our model is that both variables are affected by lagged consumption as a consequence of the interplay of formal and informal contracting possibilities. In a semiparametric setting, we prove identification, derive testable restrictions, and estimate the model with the use of data from Pakistani villages. Empirical results are consistent with the economic arguments. Incentive constraints due to self-enforcement bind with positive probability and formal contracts are used to reduce this probability. [source]

Moral Hazard Contracting and Private Credit Markets

ECONOMETRICA, Issue 3 2004
In-Uck Park
This paper studies the impact of credit markets on optimal contracting, when the agent's "interim preference" over upcoming contracts is private information because personal financial decisions affect it via the wealth effect. The main result is a severe loss of incentive provision: equilibrium contracts invariably cause the agent to shirk (i.e., exert minimal effort) if the agent's private financial decision precedes moral hazard contracting. The basic intuition is that committing on another private variable, other than the effort level, exposes the parties to further exploitation of efficient risk-sharing by relaxing the incentive constraint that was binding ex ante, unless the risk-sharing was fully efficient to begin with. [source]

Exchange Agreements Facilitate Collusion

GERMAN ECONOMIC REVIEW, Issue 2 2001
Hans-Theo Normann
A duopoly model with quantity competition is analyzed in which firms collude in two markets. There is specialization in production in order to promote efficiency. Firms may then either exclusively market one good each, or they may agree to exchange goods and cross-supply a part of the production to the other firm. It is shown that, compared to specialization in marketing, positive exchanges of goods relax the incentive constraints that limit the extent of collusion. [source]

Optimal Income Taxation With Quasi-Linear Preferences Revisited

JOURNAL OF PUBLIC ECONOMIC THEORY, Issue 4 2000
Robin Boadway
Properties of the optimal income tax for quasi-linear in leisure preferences are studied. With utilitarian or maxi-min objectives, closed-form solutions are obtained. Bunching occurs over intervals where the second-order incentive condition is binding. Whether this occurs depends solely on the skill distribution. The patterns of consumption and tax rates in the nonbunched range are independent of whether the second-order incentive constraints are binding. Bunching at the bottom can also occur if a non-negative constraint on incomes is binding for some households. The pattern of marginal tax rates depends on the skill distribution and whether it is truncated. [source]