Optimal Multilateral Contracts

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Optimal Multilateral Contracts

Author Info

Krasa, Stefan
Villamil, Anne P

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Anne Villamil

Abstract

The purpose of this paper is to derive the structure of optimal multilateral contracts in a costly state verification model with multiple agents who may be risk averse and need not be identical. We consider two different verification technology specifications. When the verification technology is deterministic, we show that the optimal contract is a multilateral debt contract in the sense that the monitoring set is a lower interval. When the verification technology is stochastic, we show that transfers and monitoring probabilities are decreasing functions of wealth. The key economic problem in this environment is that optimal contracts are interdependent. We are able to resolve this interdependency problem by using abstract measure theoretic tools.

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Article provided by Springer in its journal Economic Theory.

Volume (Year): 4 (1994)
Issue (Month): 2 (March)
Pages: 167-87
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Handle: RePEc:spr:joecth:v:4:y:1994:i:2:p:167-87

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Elizabeth Asiedu & Yi Jin & Anne Villamil, 2006. "Do lack of transparency and enforcement undermine international risk-sharing?," Annals of Finance, Springer, vol. 2(2), pages 123-140, March. [Downloadable!] (restricted)
M. Martin Boyer, 2004. "On the Use of Hierarchies to Complete Contracts when Players Have Limited Abilities," CIRANO Working Papers 2004s-41, CIRANO. [Downloadable!]
Chander, Parkash & Wilde, Louis., 1994. "A General Characterization of Optimal Income Taxation and Enforcement," Working Papers 791, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
Marco Bassetto & Christopher Phelan, 2006. "Tax riots," Working Paper Series WP-06-04, Federal Reserve Bank of Chicago. [Downloadable!]
Other versions:
- Christopher Phelan & Marco Bassetto, 2004. "Tax Riots," 2004 Meeting Papers 375, Society for Economic Dynamics.
- Christopher Phelan & Marco Bassetto, 2005. "Tax Riots," 2005 Meeting Papers 433, Society for Economic Dynamics. [Downloadable!]
- Marco Bassetto & Christopher Phelan, 2008. "Tax Riots," Review of Economic Studies, Blackwell Publishing, vol. 75(3), pages 649-669, 07. [Downloadable!] (restricted)
Stanley D. Longhofer, 1994. "Bankruptcy rules and debt contracting: on the relative efficiency of absolute priority, proportionate priority, and first-come, first-served rules," Working Paper 9415, Federal Reserve Bank of Cleveland. [Downloadable!]

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