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Abstract

This article provides an analysis of screening contracts in a complete but imperfect information environment as opposed to the usual incomplete information (Bayesian) environment. An agent faces a hold-up situation while making a cost-reducing specific investment that is not observed by the principal. To prevent the hold-up, the agent randomizes his investment strategy and the principal offers a screening contract. The informational rents provided by the equilibrium contract finance the investment. For a large class of cost functions, the randomization is such that the marginal surplus follows a Power distribution.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 35 (2004)
Issue (Month): 3 (Autumn)
Pages: 502-519

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Handle: RePEc:rje:randje:v:35:y:2004:3:p:502-519

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Find related papers by JEL classification:

• L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
• D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

References

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1. Rogerson, William P, 1992. "Contractual Solutions to the Hold-Up Problem," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 777-93, October.
2. Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
   
   • Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-85, July.
   • Hardman Moore, John & Hart, Oliver, 1985. "Incomplete Contracts and Renegotiation," CEPR Discussion Papers 60, C.E.P.R. Discussion Papers.
3. Andrew F. Daughety & Jennifer F. Reinganum, 1994. "Product Safety: Liability, R&D and Signaling," Game Theory and Information 9403007, EconWPA, revised 30 Mar 1994.
   
   • Daughety, Andrew F & Reinganum, Jennifer F, 1995. "Product Safety: Liability, R&D, and Signaling," American Economic Review, American Economic Association, vol. 85(5), pages 1187-1206, December.
   • Daughety, Andrew & Reinganum, Jennifer, 1992. "Product Safety: Liability, R & D and Signaling," Working Papers 94-17, University of Iowa, Department of Economics, revised 1994.
4. Georg Nöldeke & Klaus M. Schmidt, 1992. "Option Contracts and Renegotiation - A Solution to the Hold-Up Problem," Discussion Paper Serie A 417, University of Bonn, Germany, revised Aug 1993.
   
   • Georg Noldeke & Klaus M. Schmidt, 1995. "Option Contracts and Renegotiation: A Solution to the Hold-Up Problem," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 163-179, Summer.
5. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
6. Gul, Faruk, 2001. "Unobservable Investment and the Hold-Up Problem," Econometrica, Econometric Society, vol. 69(2), pages 343-76, March.
   
   • F. Gul, 2000. "Unobservable Investment and the Hold-Up Problem," Princeton Economic Theory Papers 00s10, Economics Department, Princeton University.
7. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-40, September.
8. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
   
   • Drew Fudenberg & Jean Tirole, 1988. "Moral Hazard and Renegotiation in Agency Contracts," Working papers 494, Massachusetts Institute of Technology (MIT), Department of Economics.
9. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-59, April.
   
   • Jean Tirole, 1985. "Procurement and Renegotiation," Working papers 362, Massachusetts Institute of Technology (MIT), Department of Economics.
10. Aaron S. Edlin & Stefan Reichelstein, 1997. "Holdups, Standard Breach Remedies, and Optimal Investment," NBER Working Papers 5007, National Bureau of Economic Research, Inc.
    
    • Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, vol. 86(3), pages 478-501, June.
11. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826, September.

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Cited by:

1. Maria Goltsman, 2011. "Optimal information transmission in a holdup problem," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 495-526, 09.
2. Sloof, Randolph, 2008. "Price-setting power vs. private information: An experimental evaluation of their impact on holdup," European Economic Review, Elsevier, vol. 52(3), pages 469-486, April.
3. Goldlücke, Susanne & Schmitz, Patrick W, 2011. "Investments as Signals of Outside Options," CEPR Discussion Papers 8366, C.E.P.R. Discussion Papers.
4. Jakub Kastl & David Martimort & Salvatore Piccolo, 2008. "Delegation and R&D Spending: Evidence from Italy," CSEF Working Papers 192, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 17 Oct 2009.
5. AGRELL, Per & KASPERZEC, Roman, 2010. "Dynamic joint investments in supply chains under information asymmetry," CORE Discussion Papers 2010085, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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