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Optimal Multilateral Contracts

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Listed:
  • Krasa, Stefan
  • Villamil, Anne P

Abstract

The purpose of this paper is to derive the structure of optimal multilateral contracts in a costly state verification model with multiple agents who may be risk averse and need not be identical. We consider two different verification technology specifications. When the verification technology is deterministic, we show that the optimal contract is a multilateral debt contract in the sense that the monitoring set is a lower interval. When the verification technology is stochastic, we show that transfers and monitoring probabilities are decreasing functions of wealth. The key economic problem in this environment is that optimal contracts are interdependent. We are able to resolve this interdependency problem by using abstract measure theoretic tools.

Suggested Citation

  • Krasa, Stefan & Villamil, Anne P, 1994. "Optimal Multilateral Contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(2), pages 167-187, March.
  • Handle: RePEc:spr:joecth:v:4:y:1994:i:2:p:167-87
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    Citations

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    Cited by:

    1. Caffera, Marcelo & Dubra, Juan & Figueroa, Nicolás, 2018. "Mechanism design when players’ preferences and information coincide," Mathematical Social Sciences, Elsevier, vol. 91(C), pages 56-61.
    2. Elizabeth Asiedu & Yi Jin & Anne Villamil, 2006. "Do lack of transparency and enforcement undermine international risk-sharing?," Annals of Finance, Springer, vol. 2(2), pages 123-140, March.
    3. Waly Wane, 2002. "Income Taxation and Tax Evasion in a Finite Economy," Annals of Economics and Finance, Society for AEF, vol. 3(2), pages 407-431, November.
    4. Zhixiong Zeng, 2013. "A theory of the non-neutrality of money with banking frictions and bank recapitalization," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(2), pages 729-754, March.
    5. Marco Bassetto & Christopher Phelan, 2008. "Tax Riots," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 649-669.
    6. Antinolfi, Gaetano & Kawamura, Enrique, 2008. "Banks and markets in a monetary economy," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 321-334, March.
    7. Angelo Baglioni & Luca Colombo, 2009. "Managers' Compensation And Misreporting: A Costly State Verification Approach," Economic Inquiry, Western Economic Association International, vol. 47(2), pages 278-289, April.
    8. Hans Hvide & Tore Leite, 2010. "Optimal debt contracts under costly enforcement," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 44(1), pages 149-165, July.
    9. Tan, Liang, 2013. "Creditor control rights, state of nature verification, and financial reporting conservatism," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 1-22.
    10. Villamil, Anne P., 2003. "Introduction to capital accumulation and allocation in economic growth," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(4), pages 583-591.
    11. M. Martin Boyer, 2004. "On the Use of Hierarchies to Complete Contracts when Players Have Limited Abilities," CIRANO Working Papers 2004s-41, CIRANO.
    12. Podczeck, Konrad & Yannelis, Nicholas C., 2008. "Equilibrium theory with asymmetric information and with infinitely many commodities," Journal of Economic Theory, Elsevier, vol. 141(1), pages 152-183, July.
    13. Stanley D. Longhofer, 1994. "Bankruptcy rules and debt contracting: on the relative efficiency of absolute priority, proportionate priority, and first-come, first-served rules," Working Paper 9415, Federal Reserve Bank of Cleveland.

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