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Abstract

This paper provides new analytical tools for studying principal{agent problems with adverse selection and limited commitment. By allowing the principal to use general communication devices we overcome the literature's common, but overly restrictive focus on one{shot, direct communication. In addition, general communication devices solve two fundamental probems of contracting with imperfect commitment: First, they allow us to identify the `local downward' incentive constraints as the relevant ones if the agent's preferences satisfy a single{crossing property. Second, we show how one may restrict the cardinality of the message spaces of the communi- cation device. An example illustrates our arguments and the suboptimality of one-shot, direct communication.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 136 (2007)
Issue (Month): 1 (September)
Pages: 236-259

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Handle: RePEc:eee:jetheo:v:136:y:2007:i:1:p:236-259

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Web page: http://www.elsevier.com/locate/inca/622869

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Find related papers by JEL classification:

• D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
• C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

References

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Citations

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Cited by:

1. Vasiliki Skreta, 2005. "Sequentially Optimal Mechanisms," UCLA Economics Online Papers 342, UCLA Department of Economics.
2. Bester, Helmut & Krähmer, Daniel, 2012. "Exit options in incomplete contracts with asymmetric information," Journal of Economic Theory, Elsevier, vol. 147(5), pages 1947-1968.
   
   • Bester, Helmut & Krähmer, Daniel, 2008. "Exit Options in Incomplete Contracts with Asymmetric Information," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 251, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
   • Bester, Helmut & Krähmer, Daniel, 2008. "Exit options in incomplete contracts with asymmetric information," Discussion Papers 2008/23, Free University Berlin, School of Business & Economics.
3. Bester, Helmut, 2005. "Externalities, Communication and the Allocation of Decision Rights," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 69, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
   
   • Helmut Bester, 2009. "Externalities, communication and the allocation of decision rights," Economic Theory, Springer, vol. 41(2), pages 269-296, November.
   • Bester, Helmut, 2005. "Externalities, Communication and the Allocation of Decision Rights," CEPR Discussion Papers 5391, C.E.P.R. Discussion Papers.
   • Helmut Bester, . "Externalities, Communication and the Allocation of Decision Rights," Papers 027, Departmental Working Papers.
   • Bester, Helmut, 2005. "Externalities, communication and the allocation of decision rights," Discussion Papers 2005/21, Free University Berlin, School of Business & Economics.
4. Shirley J. , HO, 2007. "R&D Outsourcing Contract with Information Leakage," Discussion Papers (ECON - Département des Sciences Economiques) 2007026, Université catholique de Louvain, Département des Sciences Economiques.
5. Gagnepain, Philippe & Ivaldi, Marc & Martimort, David, 2010. "The Cost of Contract Renegotiation: Evidence from the Local Public Sector," IDEI Working Papers 637, Institut d'Économie Industrielle (IDEI), Toulouse.
   
   • Gagnepain, Philippe & Ivaldi, Marc & Martimort, David, 2010. "The Cost of Contract Renegotiation: Evidence from the Local Public Sector," TSE Working Papers 10-190, Toulouse School of Economics (TSE).
   • Philippe Gagnepain & Marc Ivaldi & David Martimort, 2012. "The cost of contract renegotiation: Evidence from the local public sector," PSE Working Papers hal-00710639, HAL.
   • Gagnepain, Philippe & Ivaldi, Marc & Martimort, David, . "The Cost of contract renegotiation: evidence from the local public sector," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/5249, Universidad Carlos III de Madrid.
   • Gagnepain, Philippe & Ivaldi, Marc & Martimort, David, 2010. "The cost of contract renegotiation: Evidence from the local public sector," CEPR Discussion Papers 8042, C.E.P.R. Discussion Papers.
   • Phillippe Gagnepain & Marc Ivaldi & David Martimort, 2009. "The Cost of contract renegotiation: evidence from the local public sector," Economics Working Papers we096742, Universidad Carlos III, Departamento de Economía.
6. Yaron Leitner, 2010. "Inducing agents to report hidden trades: a theory of an intermediary," Working Papers 10-28, Federal Reserve Bank of Philadelphia.
7. Krahmer, Daniel, 2006. "Message-contingent delegation," Journal of Economic Behavior & Organization, Elsevier, vol. 60(4), pages 490-506, August.

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