Contracting for Multiple Goods under Asymmetric Information: The Two-goods Case
AbstractThis paper investigates how a buyer and a seller exchanging two goods should write the contract, where the seller makes sequences of unobservable relation-specific investments and the buyer privately learns valuations for goods which are stochastically influenced by the investments and these two types of asymmetric information cause inefficiency in trading. Three types of contract structures are possible. In a dynamic contract, the goods are traded sequentially and the order for the second good can be canceled to restore efficiency for the first good. In separate contracts, two goods are treated independently, whereas the two goods are bundled as a single good in bundled contracts. It will be shown that the dynamic contract is suboptimal and that the second-best contract is either a separate or a bundle contract, depending on the costs of investments.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 888.
Date of creation: Feb 2014
Date of revision:
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Postal: Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501
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More information through EDIRC
bilateral trading; cooperative investment; dynamic contract; hidden action; hidden information.;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-03-01 (All new papers)
- NEP-COM-2014-03-01 (Industrial Competition)
- NEP-CTA-2014-03-01 (Contract Theory & Applications)
- NEP-GTH-2014-03-01 (Game Theory)
- NEP-MIC-2014-03-01 (Microeconomics)
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