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Optimal contracts with contingent allocation

Author

Listed:
  • Chillemi, Ottorino
  • Galavotti, Stefano
  • Gui, Benedetto

Abstract

We study the contractual design problem of a seller that observes an ex-post signal correlated with the buyer’s valuation and can make the allocation, but not payments, contingent on it. We show that, to maximize her profit, the seller should offer a menu of contracts whereby the good is transferred to the buyer only if the signal is sufficiently low. The welfare implications of these contracts are also discussed.

Suggested Citation

  • Chillemi, Ottorino & Galavotti, Stefano & Gui, Benedetto, 2020. "Optimal contracts with contingent allocation," Economics Letters, Elsevier, vol. 192(C).
    • Handle: RePEc:eee:ecolet:v:192:y:2020:i:c:s016517652030149x
    DOI: 10.1016/j.econlet.2020.109202
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    References listed on IDEAS

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    More about this item

    Keywords

    Ex-post information; signal; contingent contracts;
    All these keywords.

    JEL classification:

    • 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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