IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2301.13404.html
   My bibliography  Save this paper

Opaque Contracts

Author

Listed:
  • Andreas Haupt
  • Zoe Hitzig

Abstract

Firms have access to abundant data on market participants. They use these data to target contracts to agents with specific characteristics, and describe these contracts in opaque terms. In response to such practices, recent proposed regulations aim to increase transparency, especially in digital markets. In order to understand when opacity arises in contracting and the potential effects of proposed regulations, we study a moral hazard model in which a risk-neutral principal faces a continuum of weakly risk-averse agents. The agents differ in an observable characteristic that affects the payoff of the principal. In a described contract, the principal sorts the agents into groups, and to each group communicates a distribution of output-contingent payments. Within each group, the realized distribution of payments must be consistent with the communicated contract. A described contract is transparent if the principal communicates the realized contract to the agent ex-ante, and otherwise it is opaque. We provide a geometric characterization of the principal's optimal described contract as well as conditions under which the optimal described mechanism is transparent and opaque. We apply our results to the design and description of driver payment schemes on ride-hailing platforms.

Suggested Citation

  • Andreas Haupt & Zoe Hitzig, 2023. "Opaque Contracts," Papers 2301.13404, arXiv.org.
    • Handle: RePEc:arx:papers:2301.13404
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2301.13404
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-1797, November.
    2. Teddy Mekonnen, 2021. "Informed principal, moral hazard, and limited liability," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 9(1), pages 119-142, April.
    3. Beaudry, Paul, 1994. "Why an Informed Principal May Leave Rents to an Agent," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 821-832, November.
    4. Dirk Bergemann & Stephen Morris, 2019. "Information Design: A Unified Perspective," Journal of Economic Literature, American Economic Association, vol. 57(1), pages 44-95, March.
    5. Glenn Ellison, 2005. "A Model of Add-On Pricing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 585-637.
    6. Inderst, Roman, 2001. "Incentive schemes as a signaling device," Journal of Economic Behavior & Organization, Elsevier, vol. 44(4), pages 455-465, April.
    7. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    8. Dirk Bergemann & Tibor Heumann & Stephen Morris, 2022. "Screening with Persuasion," Papers 2212.03360, arXiv.org.
    9. Ignacio Esponda, 2008. "Behavioral Equilibrium in Economies with Adverse Selection," American Economic Review, American Economic Association, vol. 98(4), pages 1269-1291, September.
    10. Auster, Sarah, 2013. "Asymmetric awareness and moral hazard," Games and Economic Behavior, Elsevier, vol. 82(C), pages 503-521.
    11. Robert J. Aumann, 1995. "Repeated Games with Incomplete Information," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262011476, December.
    12. Filiz-Ozbay, Emel, 2012. "Incorporating unawareness into contract theory," Games and Economic Behavior, Elsevier, vol. 76(1), pages 181-194.
    13. Piotr Dworczak, 2020. "Mechanism Design With Aftermarkets: Cutoff Mechanisms," Econometrica, Econometric Society, vol. 88(6), pages 2629-2661, November.
    14. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Schumacher, Heiner & Thysen, Heidi Christina, 2022. "Equilibrium contracts and boundedly rational expectations," Theoretical Economics, Econometric Society, vol. 17(1), January.
    2. Nicholas Charles Bedard, 2017. "Contracts in informed-principal problems with moral hazard," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 5(1), pages 21-34, April.
    3. Teddy Mekonnen, 2021. "Informed principal, moral hazard, and limited liability," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 9(1), pages 119-142, April.
    4. Andriy Zapechelnyuk, 2023. "On the equivalence of information design by uninformed and informed principals," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(4), pages 1051-1067, November.
    5. Frances Xu Lee & Yuk‐fai Fong, 2017. "Signaling by an informed service provider," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(4), pages 955-968, December.
    6. Wagner, Christoph & Mylovanov, Tymofiy & Tröger, Thomas, 2015. "Informed-principal problem with moral hazard, risk neutrality, and no limited liability," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 280-289.
    7. Haisken-DeNew, John & Hasan, Syed & Jha, Nikhil & Sinning, Mathias, 2018. "Unawareness and selective disclosure: The effect of school quality information on property prices," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 449-464.
    8. Sarah Auster & Nicola Pavoni, 2020. "Limited Awareness and Financial Intermediation," ECONtribute Discussion Papers Series 043, University of Bonn and University of Cologne, Germany.
    9. Bedard, Nicholas C., 2017. "The strategically ignorant principal," Games and Economic Behavior, Elsevier, vol. 102(C), pages 548-561.
    10. Dirk Bergemann & Tibor Heumann & Stephen Morris, 2022. "Screening with Persuasion," Cowles Foundation Discussion Papers 2338, Cowles Foundation for Research in Economics, Yale University.
    11. Kaushik Basu, 2016. "Beyond the Invisible Hand: Groundwork for a New Economics," Economics Books, Princeton University Press, edition 1, number 9299.
    12. Monte, Daniel & Linhares, Luis Henrique, 2023. "Stealth Startups, Clauses, and Add-ons: A Model of Strategic Obfuscation," MPRA Paper 115926, University Library of Munich, Germany.
    13. Anastasios Dosis, 2022. "On the informed principal model with common values," RAND Journal of Economics, RAND Corporation, vol. 53(4), pages 792-825, December.
    14. Frédéric Koessler & Vasiliki Skreta, 2023. "Informed Information Design," Journal of Political Economy, University of Chicago Press, vol. 131(11), pages 3186-3232.
    15. Nishimura, Takeshi, 2022. "Informed principal problems in bilateral trading," Journal of Economic Theory, Elsevier, vol. 204(C).
    16. Zibin Xu & Anthony Dukes, 2022. "Personalization from Customer Data Aggregation Using List Price," Management Science, INFORMS, vol. 68(2), pages 960-980, February.
    17. Celik, Gorkem & Peters, Michael, 2011. "Equilibrium rejection of a mechanism," Games and Economic Behavior, Elsevier, vol. 73(2), pages 375-387.
    18. Li, Sanxi & Peitz, Martin & Zhao, Xiaojian, 2016. "Information disclosure and consumer awareness," Journal of Economic Behavior & Organization, Elsevier, vol. 128(C), pages 209-230.
    19. Dongsoo Shin & S. Andrew Starbird, 2009. "Risk Taking as Self Discipline in Contractual Relationships," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 16(3), pages 289-304.
    20. Heiko Karle & Christian Staat, 2013. "Signaling Quality with Initially Reduced Royalty Rates," Working Papers ECARES ECARES 2013-44, ULB -- Universite Libre de Bruxelles.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2301.13404. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.