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Optimal contracting with private information on cost expectation and variability

  • Danau, Daniel
  • Vinellay, Annalisa
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    We study the screening problem that arises in a framework where, initially, the agent is privately informed about both the expected production cost and the cost variability and, at a later stage, he learns privately the cost realization. The speci c set of relevant incentive constraints, and so the characteristics of the optimal mechanism, depend nely upon the curvature of the principal s marginal surplus function as well as the relative importance of the two initial information problems. Pooling of production levels is optimally induced with respect to the cost variability when the principal's knowledge imperfection about the latter is sufficiently less important than that about the expected cost.

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    File URL: http://hdl.handle.net/10943/195
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    Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2010-59.

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    Date of creation: 2010
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    Handle: RePEc:edn:sirdps:195
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    1. John Asker & Estelle Cantillon, 2006. "Procurement When Price and Quality Matter," Working Papers 06-24, New York University, Leonard N. Stern School of Business, Department of Economics.
    2. Eugenio J. Miravete, 2002. "Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 943-971.
    3. Che, Y.K., 1991. "Design Competition through Multidimensional Auctions," Working papers 9123, Wisconsin Madison - Social Systems.
    4. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-87, June.
    5. Pascal Courty & Li Hao, 2000. "Sequential Screening," Review of Economic Studies, Oxford University Press, vol. 67(4), pages 697-717.
    6. Armstrong, Mark & Rochet, Jean-Charles, 1999. "Multi-dimensional screening:: A user's guide," European Economic Review, Elsevier, vol. 43(4-6), pages 959-979, April.
    7. Dana Jr. James D., 1993. "The Organization and Scope of Agents: Regulating Multiproduct Industries," Journal of Economic Theory, Elsevier, vol. 59(2), pages 288-310, April.
    8. Miravete, Eugenio J, 1996. "Screening Consumers through Alternative Pricing Mechanisms," Journal of Regulatory Economics, Springer, vol. 9(2), pages 111-32, March.
    9. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
    10. Spulber, Daniel F, 1990. "Auctions and Contract Enforcement," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(2), pages 325-44, Fall.
    11. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
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