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Trading between agents for a better match

  • Lee, Frances (Zhiyun Xu)
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    This paper studies externalities that arise when agents can trade outcomes ex post. I show that when agents can trade outcomes ex post, principals are incentivized to contract with agents ex ante to reduce ex post transfers to outside agents with whom the principals do not directly contract. This causes principals to offer agents piece-rates that are inefficiently low and lower than the piece-rates they would offer if trading was not allowed. Although trading reduces an agent's effort and could increase the agent's outside option of rejecting a principal's ex ante contract, principals ultimately gain from allowing ex post trading because such trading results in outcomes that better match their tastes.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0167718713000891
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    Article provided by Elsevier in its journal International Journal of Industrial Organization.

    Volume (Year): 31 (2013)
    Issue (Month): 5 ()
    Pages: 501-515

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    Handle: RePEc:eee:indorg:v:31:y:2013:i:5:p:501-515
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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