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Simplification of Contracting under Adverse Selection with Ex Post State

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  • Yu Chen

    (University of Graz)

Abstract

We explore the theoretical justification of adopting bilateral mechanism design, which is a simplification of canonical collective mechanism design, in general multi-agency contracting games under Bayesian Nash equilibrium. We establish interim payoff equivalence between collective and bilateral mechanism design in the quasi-separable environment, in which interdependent valuations and correlated types are allowed. We employ interim payoff equivalence to further show the equivalence between optimal bilateral and collective mechanism design, when the principal’s payoff exhibits certain relations with separate agents‘ payoffs. Our analysis can also incorporate individual rationality and budget balance constraints and the asymptotic equivalence.

Suggested Citation

  • Yu Chen, 2017. "Simplification of Contracting under Adverse Selection with Ex Post State," Graz Economics Papers 2017-01, University of Graz, Department of Economics.
    • Handle: RePEc:grz:wpaper:2017-01
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    References listed on IDEAS

    as
    1. Page, Frank Jr. & Monteiro, Paulo K., 2003. "Three principles of competitive nonlinear pricing," Journal of Mathematical Economics, Elsevier, vol. 39(1-2), pages 63-109, February.
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    3. Kushnir, Alexey, 2015. "On sufficiency of dominant strategy implementation in environments with correlated types," Economics Letters, Elsevier, vol. 133(C), pages 4-6.
    4. Han, Seungjin, 2006. "Menu theorems for bilateral contracting," Journal of Economic Theory, Elsevier, vol. 131(1), pages 157-178, November.
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    6. Motta, Massimo & Hansen, Stephen, 2012. "Vertical Exclusion with Endogenous Competiton Externalities," CEPR Discussion Papers 8982, C.E.P.R. Discussion Papers.
    7. Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1999. "Multidimensional Mechanism Design for Auctions with Externalities," Journal of Economic Theory, Elsevier, vol. 85(2), pages 258-293, April.
    8. Alexey Kushnir, 2013. "On the equivalence between Bayesian and dominant strategy implementation: the case of correlated types," ECON - Working Papers 129, Department of Economics - University of Zurich.
    9. Ilya Segal, 1999. "Contracting with Externalities," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(2), pages 337-388.
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    More about this item

    Keywords

    Bayesian Nash equilibrium; bilateral mechanism; collective mechanism; interim payoff equivalence; quasi-separable environment;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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