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Contracting between Two Parties with Private Information

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  • Moore, John

Abstract

A risk-averse buyer and seller contract over the trade of an item. At the time of trading, they each privately know their value s and cost r respectively, but these are not known when the contract is drawn up. The contract specifies a Bayesian revelation mechanism for implementing a trading rule and prices, as functions of their type s and r. An optimal (second-best) contract balances the goal of efficient trading and risk sharing against the need to provide the agents with incentives to reveal their type truthfully. In general, it is not monotonic, and so a nonstandard technique has to be used to find the nature of the second-best distortions. Copyright 1988 by The Review of Economic Studies Limited.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Economic Studies.

Volume (Year): 55 (1988)
Issue (Month): 1 (January)
Pages: 49-69

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Handle: RePEc:bla:restud:v:55:y:1988:i:1:p:49-69

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Cited by:
  1. Kevin Roberts, 1999. "Dynamic Voting in Clubs," STICERD - Theoretical Economics Paper Series 367, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  2. Celik, Gorkem, 2006. "Mechanism design with weaker incentive compatibility constraints," Games and Economic Behavior, Elsevier, vol. 56(1), pages 37-44, July.

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