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Contracting with Imperfect Commitment and Noisy Communication

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  • Bester, Helmut
  • Strausz, Roland

Abstract

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004This paper provides an analytical framework for studying principal-agent problems with adverse selection and limited commitment. By allowing the principal to use noisy communication we solve two fundamental problems of contracting with imperfect commitment: First, we identify the relevant incentive constraints by showing that only ‘local’ constraints are binding if the agent’s preferences satisfy a single–crossing property. Second, we show that one can restrict the dimensionality of the message spaces of the communication device to the number of the agent’s types. As we illustrate in an example, these findings allow us to derive the optimal contract by a similar procedure as in contracting problems with full commitment.

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Bibliographic Info

Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 2.

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Date of creation: Dec 2003
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Handle: RePEc:trf:wpaper:2

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Keywords: contract theory; communication; imperfect commitment; adverse selection;

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References

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Citations

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Cited by:
  1. Bester, Helmut, 2005. "Externalities, Communication and the Allocation of Decision Rights," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 69, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  2. Vasiliki Skreta, 2010. "Sequentially Optimal Mechanisms," NajEcon Working Paper Reviews 391749000000000488, www.najecon.org.
  3. Alexander, Corinne & Ivanic, Rasto & Rosch, Stephanie & Tyner, Wallace & Wu, Steven Y. & Yoder, Joshua R., 2012. "Contract theory and implications for perennial energy crop contracting," Energy Economics, Elsevier, vol. 34(4), pages 970-979.
  4. Gagnepain, Philippe & Ivaldi, Marc & Martimort, David, 2010. "The Cost of Contract Renegotiation: Evidence from the Local Public Sector," IDEI Working Papers 637, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. Lim, Wooyoung, 2012. "Selling authority," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 393-415.
  6. Kumar, Praveen & Langberg, Nisan, 2013. "Information manipulation and rational investment booms and busts," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 408-425.
  7. Yaron Leitner, 2010. "Inducing agents to report hidden trades: a theory of an intermediary," Working Papers 10-28, Federal Reserve Bank of Philadelphia.
  8. Shirley J. , HO, 2007. "R&D Outsourcing Contract with Information Leakage," Discussion Papers (ECON - Département des Sciences Economiques) 2007026, Université catholique de Louvain, Département des Sciences Economiques.
  9. Bester, Helmut & Krähmer, Daniel, 2012. "Exit options in incomplete contracts with asymmetric information," Journal of Economic Theory, Elsevier, vol. 147(5), pages 1947-1968.
  10. Krahmer, Daniel, 2006. "Message-contingent delegation," Journal of Economic Behavior & Organization, Elsevier, vol. 60(4), pages 490-506, August.

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