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On the Optimality of Privacy in Sequential Contracting

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  • Alessandro Pavan

Abstract

This paper studies the exchange of information between two principals who contract sequentially with the same agent, as in the case of a buyer who purchases from multiple sellers. We show that when (a) the upstream principal is not personally interested in the downstream level of trade, (b) the agent’s valuations are positively correlated, and (c) preferences in the downstream relationship are separable, then it is optimal for the upstream principal to offer the agent full privacy. On the contrary, when any of these conditions is violated, there exist preferences for which disclosure is strictly optimal, even if the downstream principal does not pay for the information. We also examine the effects of disclosure on welfare and show that it does not necessarily reduce the agent’s surplus in the two relationships and in some cases may even yield a Pareto improvement. The paper describes this condition and its implications.

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Bibliographic Info

Paper provided by UCLA Department of Economics in its series Theory workshop papers with number 658612000000000067.

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Date of creation: 15 Apr 2004
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Handle: RePEc:cla:uclatw:658612000000000067

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  1. Taylor, Curtis R., 2003. "Privacy in Competitive Markets," Working Papers 03-10, Duke University, Department of Economics.
  2. Padilla, A Jorge & Pagano, Marco, 1997. "Endogenous Communication among Lenders and Entrepreneurial Incentives," Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 205-36.
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