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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.

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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. Giacomo Calzolari & Alessandro Pavan, 2004. "Monopoly with Resale," Discussion Papers 1393, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Michael Peters, 1999. "Common Agency and the Revelation Principle," Working Papers peters-99-01, University of Toronto, Department of Economics.
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  5. Alessandro Lizzeri, 1999. "Information Revelation and Certification Intermediaries," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 214-231, Summer.
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  9. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  10. Epstein, Larry G. & Peters, Michael, 1999. "A Revelation Principle for Competing Mechanisms," Journal of Economic Theory, Elsevier, vol. 88(1), pages 119-160, September.
  11. Laffont, Jean-Jacques & Tirole, Jean, 1990. "Adverse Selection and Renegotiation in Procurement," Review of Economic Studies, Wiley Blackwell, vol. 57(4), pages 597-625, October.
  12. Prat, A. & Rustichini, A., 1998. "Sequential Common Agency," Discussion Paper 1998-95, Tilburg University, Center for Economic Research.
  13. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
  14. Padilla, A.J. & Pagano, M., 1994. "Endogenous Communication Among Lenders and Entrepreneurial Incentives," Papers 9407, Centro de Estudios Monetarios Y Financieros-.
  15. Helmut Bester & Roland Strausz, . "Imperfect Commitment and the Revelation Principle," Papers 004, Departmental Working Papers.
  16. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
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  18. Martimort, David, 1999. "Renegotiation Design with Multiple Regulators," Journal of Economic Theory, Elsevier, vol. 88(2), pages 261-293, October.
  19. Taylor, Curtis R., 2003. "Privacy in Competitive Markets," Working Papers 03-10, Duke University, Department of Economics.
  20. Raith, Michael, 1996. "A General Model of Information Sharing in Oligopoly," Journal of Economic Theory, Elsevier, vol. 71(1), pages 260-288, October.
  21. Pagano, Marco & Jappelli, Tullio, 1993. " Information Sharing in Credit Markets," Journal of Finance, American Finance Association, vol. 48(5), pages 1693-1718, December.
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  26. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, June.
  27. David Martimort & Lars Stole, 2001. "The Revelation and Delegation Principles in Common Agency Games," CESifo Working Paper Series 575, CESifo Group Munich.
  28. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
  29. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-98, July.
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