Hold-up in Regulated Contracts: the Argentinean Natural Gas Transmission System Case
Martin C. De Meio Reggiani (Planta Piloto de Ingenieria Quimica (CONICET-UNS))
Miguel Vazquez (Universidade Federal Fluminense)
Michelle Hallack (Universidade Federal Fluminense)
Nelida B. Brignole (Planta Piloto de Ingenieria Quimica (CONICET-UNS))

Abstract : This article aims to understand the role of policy stability perception in the dynamic of network infrastructures regulation. We contribute to the literature by developing an abstract description in which the regulatory institutions in some countries have virtuous relation with network industries, while other countries enter in a vicious cycle. The asset specificities inherent to network industries mean high transaction costs, which in turn raises the hold-up risk. We depart from the idea that regulation (as tariffs structures) is a kind of contract between government and private companies. As explained by Williamson (1976) and Goldberg (1976), it is a special kind of arrangement in the presence of incomplete contract that is able to protect players from holding up themselves. However, regulation can actual play a positive or a negative role in the network infrastructure development. We depart from the contract theory proposed by Salant and Woroch (1992), who model the governments’ incentives to behave opportunistically according to investors’ investment profiles. We show that their analysis, which is based on the incentive compatibility principles, explains behaviour differences if the investment profile of the industry is heterogeneous. However, it is no able to explain why industries with similar investment profile in different countries have completely different dynamics. Stein et al. (2008) underlined the importance of policy stability to understanding the Latin America success (or failure) in implementing policies. We include the variable policy stability perception as a significant element in the understanding of the government’s incentives to behave opportunistically. We check our model with the case study of natural gas network in Argentina. This analysis contributes to understand the role network industries regulation to deal with hold-up problem and how the institutional environment in which regulatory agencies are embedded matters.

Information Asymmetry Reduction in Opaque Contexts: Evidence from Debt and Outside Equity Financing in Early Stage Firms
Mircea Epure (Universitat Pompeu Fabra and Barcelona GSE)
Martí Guasch (Universitat Pompeu Fabra)

Abstract : This study analyzes the relationship between debt and outside equity investments in early stage firms. The existing evidence on this relationship is scarce and inconclusive, mostly due to the pervasive opaqueness of new ventures. We argue that debt and its usage can be valuable signals for outside investors facing severe information asymmetries. In addition, we examine how personal and business debt could signal different information to outside investors. Using panel data on new ventures in the US from the Kauffman Firm Survey, we find evidence consistent with our arguments. We reveal that debt, and particularly business debt, is positively related to outside equity investments, especially in times of economic distress. We posit that start-ups with higher levels of business debt can send more credible signals to capital markets, and identify cash holdings and the firm-bank relationship as possible information channels for outside investors.

Relational Incentive Contracts with Collusion
Marta Troya-Martinez (New Economic School & Toulouse School of Economics)
Liam Wren-Lewis (Paris School of Economics)

Abstract : This article explores how the possibility of collusion affects relational contracts. Responsibility for a contract is delegated to a supervisor who cares about both production and kickbacks paid by the agents, neither of which are contractible. We characterize the optimal supervisor-agent relational contract and show that the relationship between joint surplus and production is nonmonotonic. Delegation may benefit the principal when relational contracting is difficult by easing the time inconsistency problem of paying incentive payments. For the principal, the optimal supervisor has incentives that are partially, but not completely, aligned with her own.

Contract Design in China's Rural Land Rental Market: Contractual Flexibility and Rental Payment
Ziyan Yang (University of Maryland, College Park)

Abstract : Established in the late 1990s, China's rural land rental market is now revolutionizing agriculture by upgrading smallholder production to factory farming. However, there is little empirical evidence on recent developments in this market, in particular on the design of rental contracts, which profoundly affects participants' welfare and agricultural production. I study rental contracts as outcomes of bargains over two contractual terms: contractual flexibility and rental payment. The theory I present shows which equations should be estimated in an empirical test of the bargaining process. The empirical structure indicated by my theory is markedly different from that in existing empirical contributions, which helps to explain why those contributions obtain seemingly inconsistent results. I conducted a survey in 2014 capturing current developments in the market. Applying the survey data to the theoretically justified empirical model, I draw two empirical conclusions in addition to providing support for my characterization of the bargaining mechanism. First, the renting-in agents' ownership of enterprises and their social proximity to the renting-out partners decrease contractual flexibility and increase rental payment, indicating that entrepreneurship within a village social network promotes agricultural development and village prosperity. Second, the rental payment offered to the renting-out agents with long-term non-agricultural employment is higher than that offered to the renting-out agents with short-term or temporary employment, suggesting a potential increase in income inequality within the village.