Essays on the theory of incentives : procurement, franchise & innovation contracts

Abstract

This thesis explores models of procurement, franchising and innovation through the lens of the theory of incentives. Chapter 2 examines the influence of type-dependent reservation utility on the optimality of linear contracts in a Principal-Agent model of procurement. Type-dependency of reservation utility, combined with the requirements of individual rationality and incentive compatibility in the principal's contracts induces a countervailing incentive effect, the strength of which depends on an index of quality or degree of competition that the agent would face in a private market. The results show how the curvature of the reservation utility dictates whether the optimal contracts can be implemented with a menu of linear contracts, and how the magnitude of the private market index influences the net-transfer rule. Chapter 3 studies contracts between a manufacturer and a retailer when the retailer has exante private information, and is subject to limited liability. The contract takes place over two periods. In the first period, the retailer can take an action which influences the manufacturer's beliefs about the distribution of demand states for a final good in the second period. The retailer sells the manufacturer's intermediate good into a final output market according to a variable fee schedule. The interaction of the limited liability constraints with incentive compatibility gives rise to an expected surplus to the retailer, which the manufacturer can extract with a franchise fee. The franchise fee can also be used as a screening device or a means of eliciting the efficient first stage action from the retailer. In Chapter 4 a developer contracts with a researcher for the production of a non-drastic innovation. Since effort is non-contractible, the developer offers an incentive contract dependent on the observed magnitude of the innovation. It is shown that the distribution of intellectual property rights (IPR) ownership does not affect the level of effort exerted for innovations where the developer would choose to license the innovation to its competitors.This is because the possibility of leakage of the innovation through licensing subsidies the developer's payment when IPR is delegated to the researcher, while at the same time eroding its profit. Show more