Strategic Ex-ante Contracts: Rent-Extraction and Opportunity Costs
This paper considers the possibility that a seller can contract with one uninformed buyer prior to an auction involving two potential buyers. In a more general setting than previous literature, strategic ex-ante contracts not only extract rent from entrants, but could also mitigate the sellerâ€™s ex-post rent-seeking vis-Ã -vis the contracted buyer, thus reducing the probability of having no trade. The sellerâ€™s optimal ex-ante contract has strategic characteristics similar to the right of first refusal, a commonly used clause. Moreover, this optimal ex-ante contract specifies a lower trade barrier for the contracted buyer. Accordingly, it could create more social welfare than the absence of ex-ante contracts, depending on the contracted buyerâ€™s ex-ante financial constraint and the distributions of trade surplus. This paper also shows how to implement the optimal strategic ex-ante contract by combining indirect clauses when the buyersâ€™ valuations follow the uniform distribution. Finally, greater flexibility in policy choice and other commonly used strategic clauses are discussed
|Date of creation:||11 Aug 2004|
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