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Contracting with Heterogeneous Externalities

Author

Listed:
  • Shai Bernstein
  • Eyal Winter

Abstract

We model situations in which a principal offers contracts to a group of agents to participate in a project. Agents' benefits from participation depend on the identity of other participating agents. We assume heterogeneous externalities and characterize the optimal contracting scheme. We show that the optimal contracts' payoff relies on a ranking, which arise from a tournament among the agents. The optimal ranking cannot be achieved by a simple measure of popularity. Using the structure of the optimal contracts, we derive results on the principal's revenue extraction and the role of the level of externalities' asymmetry. (JEL D62, D82, D86)

Suggested Citation

  • Shai Bernstein & Eyal Winter, 2012. "Contracting with Heterogeneous Externalities," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 50-76, May.
  • Handle: RePEc:aea:aejmic:v:4:y:2012:i:2:p:50-76
    Note: DOI: 10.1257/mic.4.2.50
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    File URL: http://www.aeaweb.org/aej/mic/app/2011-0152_app.pdf
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    References listed on IDEAS

    as
    1. Mutuswami, Suresh & Winter, Eyal, 2002. "Subscription Mechanisms for Network Formation," Journal of Economic Theory, Elsevier, vol. 106(2), pages 242-264, October.
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    Cited by:

    1. Smirnov, Vladimir & Wait, Andrew, 2016. "Technology, team production and incentives," Economics Letters, Elsevier, vol. 141(C), pages 91-94.
    2. Mohamed Belhaj & Frédéric Deroïan, 2015. "Contracting on Networks," Working Papers halshs-01102403, HAL.
    3. Bel, Roland & Smirnov, Vladimir & Wait, Andrew, 2015. "Team composition, worker effort and welfare," International Journal of Industrial Organization, Elsevier, vol. 41(C), pages 1-8.
    4. Bel, Roland & Smirnov, Vladimir & Wait, Andrew, 2012. "On Broadway and strip malls: how to make a winning team," Working Papers 2012-14, University of Sydney, School of Economics.

    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • 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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