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On the Optimality of Privacy in Sequential Contracting

This paper considers an environment where two principals sequentially contract with a common agent and studies the exchange of information between the two bilateral relationships. We show that when (a) the upstream principal is not personally interested in the decisions taken by the downstream principal, (b) the agent’s exogenous private information has a "vertical" structure in the sense that the sign of the single crossing condition is the same for upstream and downstream decisions, and (c) preferences in the downstream relationship are separable, then the upstream principal optimally commits to full privacy, whatever price the downstream principal is willing to pay to receive information. On the contrary, when any of the above conditions is violated, the upstream principal may find it strictly optimal to disclose a (noisy) signal of the agent’s exogenous type and/or the result of his upstream contractual activity, even if she can not make the downstream principal pay for the information she receives. We also show that disclosure does not necessarily reduce the equilibrium payoff of the agent and may lead to a Pareto improvement for the three players.

(This abstract was borrowed from another version of this item.)

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File URL: http://faculty.econ.nwu.edu/faculty/pavan/privacy.pdf
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Paper provided by UCLA Department of Economics in its series Theory workshop papers with number 658612000000000067.

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Date of creation: 15 Apr 2004
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Handle: RePEc:cla:uclatw:658612000000000067
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  1. Martimort, David & Stole, Lars, 1999. "Contractual Externalities and Common Agency Equilibria," IDEI Working Papers 110, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2003.
  2. Larry Epstein & Michael Peters, 1996. "A Revelation Principle For Competing Mechanisms," Working Papers peters-96-02, University of Toronto, Department of Economics.
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  7. Martimort, David, 1992. "Multi-Principaux avec Anti-Sélection," IDEI Working Papers 14, Institut d'Économie Industrielle (IDEI), Toulouse.
  8. Michael Peters, 1999. "Common Agency and the Revelation Principle," Working Papers peters-99-01, University of Toronto, Department of Economics.
  9. Ilya Segal & Michael D. Whinston, 2003. "Robust Predictions for Bilateral Contracting with Externalities," Econometrica, Econometric Society, vol. 71(3), pages 757-791, 05.
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  12. Jean-Jacques Laffont & Jean Tirole, 1990. "Adverse Selection and Renegotiation in Procurement," Review of Economic Studies, Oxford University Press, vol. 57(4), pages 597-625.
  13. Zheng, Charles Zhoucheng, 2002. "Optimal Auction with Resale," Staff General Research Papers 12664, Iowa State University, Department of Economics.
  14. Laffont, Jean-Jacques & Tirole, Jean, 1988. "The Dynamics of Incentive Contracts," Econometrica, Econometric Society, vol. 56(5), pages 1153-75, September.
  15. Dirk Bergemann & Juuso Valimaki, 1998. "Dynamic Common Agency," Discussion Papers 1259, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  16. Paul R. Milgrom, 1979. "Good Nevs and Bad News: Representation Theorems and Applications," Discussion Papers 407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  17. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  18. Haile, Philip A., 2003. "Auctions with private uncertainty and resale opportunities," Journal of Economic Theory, Elsevier, vol. 108(1), pages 72-110, January.
  19. Ilya Segal, 1999. "Contracting with Externalities," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 337-388.
  20. Prat, A. & Rustichini, A., 1998. "Sequential Common Agency," Discussion Paper 1998-95, Tilburg University, Center for Economic Research.
  21. Taylor, Curtis R., 2003. "Privacy in Competitive Markets," Working Papers 03-10, Duke University, Department of Economics.
  22. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
  23. Jappelli, Tullio & Pagano, Marco, 1991. "Information Sharing in Credit Markets," CEPR Discussion Papers 579, C.E.P.R. Discussion Papers.
  24. Raith, Michael, 1996. "A General Model of Information Sharing in Oligopoly," Journal of Economic Theory, Elsevier, vol. 71(1), pages 260-288, October.
  25. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, June.
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  27. Helmut Bester & Roland Strausz, . "Imperfect Commitment and the Revelation Principle," Papers 004, Departmental Working Papers.
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  29. repec:adr:anecst:y:1992:i:28:p:01 is not listed on IDEAS
  30. Andrew F. Daughety & Jennifer F. Reinganum, 2002. "Informational Externalities in Settlement Bargaining: Confidentiality and Correlated Culpability," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 587-604, Winter.
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