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Randomization in contracts with endogenous information

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  • Stefan Terstiege

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    Abstract

    I consider a situation, where the agent can acquire payoff-relevant information either before or after the contract is signed. To raise efficiency, the principal might solicit information; to retain all surplus, however, she must prevent precontractual information gathering. The following class of stochastic contracts may solve this trade-off optimally: before signing, information acquisition is not solicited, and afterwards randomly. The key insight is that randomization makes precontractual information costlier for the agent.

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    File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse07_2011.pdf
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    Bibliographic Info

    Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse07_2011.

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    Length: 25
    Date of creation: Jun 2011
    Date of revision:
    Handle: RePEc:bon:bonedp:bgse07_2011

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    Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
    Fax: +49 228 73 6884
    Web page: http://www.bgse.uni-bonn.de

    Related research

    Keywords: Information acquisition; Principal-agent; Mechanism design; Randomization;

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    1. Roland Strausz, . "Deterministic versus Stochastic Mechanisms in Principal--Agent Models," Papers 020, Departmental Working Papers.
    2. Cremer, J. & Khalil, F., 1991. "Gathering Information Before Signing a Contract," Working Papers 91-16, University of Washington, Department of Economics.
    3. Szalay, Dezsö, 2009. "Contracts with endogenous information," Games and Economic Behavior, Elsevier, vol. 65(2), pages 586-625, March.
    4. Cremer, J. & Khalil, F. & Rochet, J-C., 1997. "Contracts and productive information gathering," Discussion Paper Series In Economics And Econometrics 9707, Economics Division, School of Social Sciences, University of Southampton.
    5. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
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    7. Anke Kessler, 1998. "The Value of Ignorance," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 339-354, Summer.
    8. Lewis, Tracy R & Sappington, David E M, 1997. "Information Management in Incentive Problems," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 796-821, August.
    9. Fuente,Angel de la, 2000. "Mathematical Methods and Models for Economists," Cambridge Books, Cambridge University Press, number 9780521585293, October.
    10. Compte, Olivier & Jehiel, Philippe, 2008. "Gathering information before signing a contract: A screening perspective," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 206-212, January.
    11. Rasul, Imran & Sonderegger, Silvia, 2010. "The role of the agent's outside options in principal-agent relationships," Games and Economic Behavior, Elsevier, vol. 68(2), pages 781-788, March.
    12. Kovác, Eugen & Mylovanov, Tymofiy, 2009. "Stochastic mechanisms in settings without monetary transfers: The regular case," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1373-1395, July.
    13. Krähmer, Daniel & Strausz, Roland, 2010. "Optimal Procurement Contracts with Pre–Project Planning," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 303, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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