Essays on Contract Theory and Institution Design

This collection of essays uses tools in dynamic contracting theory to address issues in development economics, public finance, and monetary economics. Chapter 1 studies how contractual frictions interact with the amount of risk people choose to bear. Though the framework is general, I use it to examine preventive healthcare expenditure. In particular, I develop a dynamic contracting model in which differences in information and commitment technologies can account for variations in immunization rates over time and across countries. I document four salient facts regarding Diphtheria, Pertussis and Tetanus (DPT) vaccination rates: (i) lower immunization in countries with greater costs of contract enforcement, (ii) higher volatility in immunization in countries with larger informal sectors, (iii) less persistence in immunization relative to aggregate income, and (iv) negative skewness in the distribution of immunization over time. These patterns cannot be explained by efficient immunization in a frictionless economy. However, dynamic contracts subject to ex-post one-sided commitment and hidden income can rationalize these facts. This analysis shows that weak provision of public goods, such as the inefficacy of the judicial system and the degree of informality, can spillover to weak provision of preventive healthcare. A model estimated using U.S. data reveals that a health monitoring technology is welfare enhancing in the long-run, generating an increase of 4.3% in certainty equivalent consumption of the policyholder and 0.6% in the insurer’s surplus. Using the consumption neutrality of the efficient risk choice, I also devise a test to show that the hypothesis of limited commitment cannot be rejected in the data