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Implementation with contingent contracts

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  • Rahul Deb

    (University of Toronto)

  • Debasis Mishra

    (Indian Statistical Institute, Delhi)

Abstract

We study dominant strategy incentive compatibility in a mechanism design setting with contingent contracts where the utility of each agent is observed by the principal and can be contracted upon. Our main focus is on the class of linear contracts (one of the most commonly observed contingent contracts) which consist of a transfer and a flat rate of profit sharing. We first demonstrate the applications of linear contracts. We show that they can achieve efficient outcomes with budget balance overcoming a known shortcoming of the VCG mechanism. Additionally, they can be used to implement social outcomes (like the Rawlsian) that are not incentive compatible using transfers alone. We then give implicit (using a condition called acyclity) and explicit characterizations of social choice functions that are implementable using linear contracts. Further, we provide a foundation for them by showing that, in finite type spaces, every social choice function that can be implemented using a more general nonlinear contingent contract can also be implemented using a linear contract.

Suggested Citation

  • Rahul Deb & Debasis Mishra, 2014. "Implementation with contingent contracts," Discussion Papers 14-01, Indian Statistical Institute, Delhi.
    • Handle: RePEc:alo:isipdp:14-01
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    Cited by:

    1. Yoon, Kiho, 2020. "Implementability with contingent contracts," Economics Letters, Elsevier, vol. 188(C).
    2. Tingjun Liu & Dan Bernhardt, 2021. "Rent Extraction with Securities Plus Cash," Journal of Finance, American Finance Association, vol. 76(4), pages 1869-1912, August.
    3. Parikshit De & Manipushpak Mitra, 2017. "Incentives and justice for sequencing problems," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(2), pages 239-264, August.
    4. Hitoshi Matsushima, 2019. "Implementation without expected utility: ex-post verifiability," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 53(4), pages 575-585, December.
    5. Hitoshi Matsushima, 2017. "Dynamic Implementation, Verification, and Detection," CARF F-Series CARF-F-416, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    6. Liu, Tingjun & Bernhardt, Dan, 2019. "Optimal equity auctions with two-dimensional types," Journal of Economic Theory, Elsevier, vol. 184(C).
    7. Wong, Tak-Yuen & Wong, Ho-Po Crystal, 2023. "Securities auctions with pre-project information management," International Journal of Industrial Organization, Elsevier, vol. 88(C).
    8. Yingkai Li & Jonathan Libgober, 2023. "Optimal Scoring for Dynamic Information Acquisition," Papers 2310.19147, arXiv.org.
    9. Liu, Heng, 2018. "Efficient dynamic mechanisms in environments with interdependent valuations: the role of contingent transfers," Theoretical Economics, Econometric Society, vol. 13(2), May.
    10. Hitoshi Matsushima, 2015. "Implementation, Verification, and Detection," CIRJE F-Series CIRJE-F-991, CIRJE, Faculty of Economics, University of Tokyo.
    11. Pan, Lijun & Wang, Dazhong, 2021. "The broker-optimal bilateral trading mechanisms with linear contracts," Economics Letters, Elsevier, vol. 208(C).

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