Multi-agent contracting with countervailing incentives and limited liability
AbstractWe consider a principal who deals with two privately informed agents protected by limited liability. Their technologies are such that the fixed costs decline with the marginal costs (the types), which are correlated. Because of these technological features, agents display countervailing incentives to misrepresent type. We show that, with high liability, the first-best outcome can be effected for any type if (1) the fixed cost is non-concave in type, under the contract that yields the smallest feasible loss to agents; (2) the fixed cost is not very concave in type, under the contract that yields the maximum sustainable loss to agents. We further show that, with low liability, the first-best outcome is still implemented for a non-degenerate range of types if the fixed cost is less concave in type than some given threshold, which tightens as the liability reduces. The optimal contract entails pooling otherwise..
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Bibliographic InfoPaper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 0911.
Date of creation: Sep 2009
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Countervailing incentives; Limited liability; Correlation; Pooling;
Other versions of this item:
- Danau, Daniel & Vinella, Annalisa, 2010. "Multi-agent contracting with countervailing incentives and limited liability," SIRE Discussion Papers 2010-13, Scottish Institute for Research in Economics (SIRE).
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-11-14 (All new papers)
- NEP-BEC-2009-11-14 (Business Economics)
- NEP-CTA-2009-11-14 (Contract Theory & Applications)
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