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Optimal profit sharing mechanisms with type-dependent outside options

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  • Sun, Wuqin
  • Wang, Dazhong
  • Zhang, Yue

Abstract

This study considers a principal using a profit sharing mechanism to select one among multiple agents with type-dependent outside options to operate a project. Under mild conditions, we fully characterize revenue-maximizing profit sharing mechanisms. Moreover, we show that if the monotonicity of the virtual valuation holds, then optimal sharing mechanisms can be implemented by the first- and second-price share auctions with an optimally chosen reserve price. We further find that the principal’s expected revenue improves as outside options diminish and break-even shares become less responsive. When outside options are linear in types, full surplus extraction is obtained.

Suggested Citation

  • Sun, Wuqin & Wang, Dazhong & Zhang, Yue, 2018. "Optimal profit sharing mechanisms with type-dependent outside options," Journal of Mathematical Economics, Elsevier, vol. 75(C), pages 57-66.
    • Handle: RePEc:eee:mateco:v:75:y:2018:i:c:p:57-66
    DOI: 10.1016/j.jmateco.2017.12.007
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