Aggey Semenov

Exclusion via Non-Exclusive Contracts

We establish that nonlinear vertical contracts can allow an incumbent to exclude an upstream rival in a setting that does not rely on the exclusivity of the incumbents contracts with downstream firms or any limits on distribution channels available to the incumbent or rival. The optimal contract we describe is a threepart quantity discounting contract that involves the payment of an allowance to a downstream distributor and a marginal wholesale price below the incumbents marginal cost for sufficiently large quantities. The optimal contract is robust to allowing parties to renegotiate contracts in case of entry.

A Theory of Contracts With Limited Enforcement

We present a Theory of Contracts under costly enforcement in the context of a dynamic relationship between an uninformed buyer and a seller who is privately informed on his persistent cost at the outset. Public enforcement relies on remedies for breach. Private enforcement comes from severing relationships. We first characterize aggregate enforcement constraints ensuring that trading partners do not breach contracts unduly. Whether a long-term contract is enforceable does not depend on the distribution of penalties for breach between the buyer and the seller. While under complete information, the optimal contract would remain stationary, non-stationarity might arise under asymmetric information. Enforcement constraints are time-dependent and easier to satisfy as time passes. Indeed, a high-cost seller may be tempted to trade high volumes at high prices at the beginning of the relationship before breaching the contract later on. Yet, such take-the-money-and-run strategy becomes less attractive as time passes and can be prevented with back loaded payments. The optimal contract thus goes through two different phases. First, quantities and prices increase at the inception of the relationship. Later on, the contract looks more stationary. Long-run screening distortions encapsulate the quality of enforcement, offering de facto a link between the quality of the legal system and contractual performances.

Delegation to a possibly ignorant agent

In a delegation problem, an uninformed principal delegates decision-making powers to a biased and possibly ignorant agent. The principal cannot use monetary payments but can restrict the set of the agents choices. I show that in the general case, the principal may offer a disconnected set of choices. In a setting with arbitrary bias the uncertainty principle holdsthe principal benefits as the likelihood that the agent is informed increases. When the bias is constant, I show that the ally principle holdsthe principal benefits as the bias becomes smaller. Finally, when the likelihood of the agent being informed is determined by the agents effort, then for small biases the principal benefits from limiting the agents choice. When the agent is sufficiently biased, the principal gives more choice to the agent, so as to to improve incentives for information acquisition.

Technological Progress and Sectoral Shares

This paper studies the effect of differences in the rate of technological progress between sectors on the relative sizes of those sectors in terms of revenues. There are two sectors: a stagnant sector, where productivity does not change over time, and a progressive sector, where costs decrease over time due to exogenous technological progress. We consider a conjectural variation approach to competition in the progressive sector which encompasses perfect competition, Cournot oligopoly and monopoly. The main result of the paper is that the share of the stagnant sector increases over time when demand in the progressive sector is inelastic. Under perfect competition, when initial production costs in the progressive sector are sufficiently low (so that demand is inelastic), the share of the stagnant sector rises over time. Whereas, when initial production costs are sufficiently high (so that demand is elastic), the relative size of the stagnant sector is U-shaped with respect to time. Under monopoly, the share of the stagnant sector always decreases over time. However, the decline in that share is much more rapid the higher are initial costs in the progressive sector. The interaction of market structure and price elasticity (or initial costs) determines how the relative sizes of sectors differing in productivity growth evolve over time. The relationship with the cost disease literature is discussed.