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Sequential Contracting with Multiple Principals

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  • Calzolari, Giacomo
  • Pavan, Alessandro

Abstract

This paper considers dynamic games in which multiple principals contract sequentially and non-cooperatively with the same agent and provides characterization results useful for applications. Our benchmark model is one of private contracting in which downstream principals do not observe upstream mechanisms, nor the decisions taken in these mechanisms. We show that any equilibrium outcome that can be sustained with any arbitrary strategy space for the principals can also be sustained by restricting the principals to offer extended direct mechanisms. In these mechanisms, the agent first reports his extended type (i.e. his exogenous private information along with the endogenous payoff-relevant decisions contracted upstream), the principal then responds by offering the agent a (possibly degenerate) menu of contracts that are payoff— equivalent for that extended type, and finally the agent selects a contract from this menu and the contract is executed. We also show that characterizing equilibria through extended direct mechanisms is facilitated by the fact that (i) each principal can be restricted to offer a single mechanism; (ii) when the agent’s strategy is Markov (i.e. it depends only on payoff-relevant information), each mechanism can be restricted to offer a single contract to each extended type; and (iii) restricting the agent’s strategy to be Markov is without loss in the case of deterministic decisions, e.g. when the contracts are deterministic and the agent does not mix over effort. We finally show how the aforementioned results must be adjusted to accommodate alternative assumptions on the observability of upstream histories and/or the sequence of contracting examined in the literature.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6562.

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Date of creation: Nov 2007
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Handle: RePEc:cpr:ceprdp:6562

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Keywords: contracts; endogenous types; mechanism design; Sequential common agency;

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References

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  1. repec:bla:restud:v:72:y:2005:i:1:p:43-56 is not listed on IDEAS
  2. Alessandro Acquisti & Hal R. Varian, 2002. "Contidioning Prices on Purchase History," Microeconomics 0210001, EconWPA.
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  7. Giacomo Calzolari & Alessandro Pavan, 2004. "On the Optimality of Privacy in Sequential Contracting," Discussion Papers 1394, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Pauly, Mark V, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 44-62, February.
  9. Dirk & Juuso Valimaki, 1998. "Dynamic Common Agency," Cowles Foundation Discussion Papers 1206, Cowles Foundation for Research in Economics, Yale University.
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  12. David Martimort & Lars Stole, 2002. "The Revelation and Delegation Principles in Common Agency Games," Econometrica, Econometric Society, vol. 70(4), pages 1659-1673, July.
  13. Giacomo Calzolari & Alessandro Pavan, 2008. "On the Use of Menus in Sequential Common Agency," Discussion Papers 1498, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  14. McAfee, R Preston, 1993. "Mechanism Design by Competing Sellers," Econometrica, Econometric Society, vol. 61(6), pages 1281-1312, November.
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  16. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-98, July.
  17. Han, Seungjin, 2004. "Menu Theorems for Bilateral Contracting," Micro Theory Working Papers han-04-01-29-10-05-13, Microeconomics.ca Website, revised 29 Jan 2004.
  18. Faure-Grimaud, Antoine & Martimort, David, 2003. " Regulatory Inertia," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 413-37, Autumn.
  19. Epstein, Larry G. & Peters, Michael, 1999. "A Revelation Principle for Competing Mechanisms," Journal of Economic Theory, Elsevier, vol. 88(1), pages 119-160, September.
  20. Kathryn E. Spier & Michael D. Whinston, 1995. "On the Efficiency of Privately Stipulated Damages for Breach of Contract: Entry Barriers, Reliance, and Renegotiation," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 180-202, Summer.
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Citations

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Cited by:
  1. Sambuddha Ghosh & Seungjin Han, 2012. "Dynamic Competing Mechanisms," Department of Economics Working Papers 2012-03, McMaster University.
  2. Peters, Michael & Troncoso-Valverde, Cristian, 2010. "A Folk Theorem for Competing Mechanisms," Micro Theory Working Papers michael_peters-2010-17, Microeconomics.ca Website, revised 10 Jun 2010.
  3. Peters, Michael, 2010. "On the Revelation Principle and Reciprocal Mechanisms in Competing Mechanism Games," Micro Theory Working Papers michael_peters-2010-18, Microeconomics.ca Website, revised 13 May 2010.
  4. Giacomo Calzolari & Alessandro Pavan, 2008. "On the Use of Menus in Sequential Common Agency," Discussion Papers 1498, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Seungjin Han, 2012. "Implicit Collusion in Non-Exclusive Contracting under Adverse Selection," Department of Economics Working Papers 2012-15, McMaster University, revised Apr 2013.

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