IDEAS home Printed from https://ideas.repec.org/a/oup/restud/v55y1988i1p49-69..html
   My bibliography  Save this article

Contracting Between Two Parties with Private Information

Author

Listed:
  • John Moore

Abstract

A risk averse buyer and seller contract over the trade of an item. At the time of trading they each privately know their value s and cost r respectively, but these are not known when the contract is drawn up. The contract specifies a Bayesian revelation mechanism for implementing a trading rule and prices, as functions of their types s and r. An optimal (second-best) contract balances the goal of efficient trading and risk sharing against the need to provide the agents with incentives to reveal their type truthfully. An optimal contract is characterized. First, it is efficient to have some insurance from a third party: even though neither the buyer nor the seller will be fully insured, there is no need for the buyer to be exposed to the seller's risk or vice versa. Second, there will be less than first-best trade (underproduction). Third, once they have privately learnt their type—but before they have played the mechanism—both the buyer and the seller prefer that the final outcome will be trade rather than no trade. Fourth, although the trade prices increase with s and r, the rest of the contract need not be monotonic. This lack of monotonicity means that the standard methodology fails: it is not enough simply to appeal to local incentive compatibility, since global incentive constraints may bind. A nonstandard technique has to be used to find the nature of the second-best distortions.

Suggested Citation

  • John Moore, 1988. "Contracting Between Two Parties with Private Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(1), pages 49-69.
  • Handle: RePEc:oup:restud:v:55:y:1988:i:1:p:49-69.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.2307/2297529
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Celik, Gorkem, 2006. "Mechanism design with weaker incentive compatibility constraints," Games and Economic Behavior, Elsevier, vol. 56(1), pages 37-44, July.
    2. Keshab BHATTARAI, 2008. "Bargaining, Coalitions, Signalling and Repeated Games for Economic Development and Poverty Alleviation," EcoMod2008 23800012, EcoMod.
    3. Roberts, Kevin, 2015. "Dynamic voting in clubs," Research in Economics, Elsevier, vol. 69(3), pages 320-335.
    4. William S. Lovejoy, 2006. "Optimal Mechanisms with Finite Agent Types," Management Science, INFORMS, vol. 52(5), pages 788-803, May.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:restud:v:55:y:1988:i:1:p:49-69.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://academic.oup.com/restud .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.