Three Essays On Contract Renegotiation

Author : Myoungki Lee
Publisher :
ISBN 13 :
Total Pages : 160 pages
Book Rating : 4.:/5 (824 download)

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Download or read book Three Essays on Applied Contracting written by Myoungki Lee and published by . This book was released on 2006 with total page 160 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: In the first and second essays, I use economic models of relational contracting to assess the potential economic impact of proposed legislation that would require processors to pay termination damages to growers when contractual relationships are prematurely terminated. Asset specificity, ex post bargaining power on the part of processors, and an exogenous shock that undermines gains from trade are introduced into the models. In the first essay, I assume that processors and growers can initiate relational contracts based on some observable, but non-verifiable, performance measure. I conclude that under symmetric information about an exogenous shock, termination damages would not be distortionary and would not undermine processors' ability to design effective incentives. Therefore, termination damages do not affect growers' expected payoffs in optimal relational contracts. However, under asymmetric information about an exogenous shock, termination damages can either increase or reduce growers' expected payoffs. In the second essay, I assume that performance measures are subjective in the sense that the processor and grower may not necessarily agree on measured performance outcomes. I show that while contract termination is used as an incentive device, pay for performance is no longer used. Under symmetric information about an exogenous shock, government imposed termination damages would not be distortionary and would induce only a restructuring of the compensation plan. In the third essay, I present results from an experiment that investigates the existence and causes of self-serving bias and the effect of this bias on subjects' strategic behavior in a multi-period incomplete contracting game. The data shows that self-serving bias exists in the aggregate and is caused by substantial heterogeneity in subjects' responses to unenforceable contract terms. Self-serving bias has no significant direct effect on subjects' contract rejection decisions, but it does have a significant effect on the surplus generated from a contract conditioned on acceptance. My results suggest that economic factors, such as the history of payoffs, are more important direct causes of bargaining impasses than are psychological factors, such as self-serving bias, but that self-serving bias indirectly contributes to these impasses.