Incentives to Invest in Short-term vs. Long-term Contracts: Evidence from a Natural Experiment

Dubois, Pierre and Vukina, Tomislav (2009) Incentives to Invest in Short-term vs. Long-term Contracts: Evidence from a Natural Experiment. IDEI Working Paper, n. 590

[img]
Preview
Text
Download (278kB) | Preview
Official URL: http://tse-fr.eu/pub/21782

Abstract

In this paper we study the effects of the change in contract length on the agents' incentives to invest and exert effort. We present an agent's dynamic decision model that explicitly deals with two types of investments and directly allows for contract regime switching by varying
the probability of contract renewal parameter. The fact that the unobservable investment in human capital is complementary with the agent's effort produces a result that increasing the probability of contract renewal increases investment and effort, with the consequent increase in production. We also show that there exists a specific level of investment in human capital, for which the investment in physical capital is profitable. We test these theoretical predictions using contract settlement data for the production of hatching eggs. The data was generated by a natural experiment where during the period covered by the data the contract had changed from short-term to long-term. The obtained empirical results are largely supportive of the developed
theory.

Item Type: Monograph (Working Paper)
Language: English
Date: January 2009
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:03
Last Modified: 07 Mar 2018 13:22
OAI ID: oai:tse-fr.eu:21782
URI: http://publications.ut-capitole.fr/id/eprint/15004

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year