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Contracting for Multiple Goods under Asymmetric Information: The Two-goods Case

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  • Kazumi Hori

    () (College of Economics, Ritsumeikan University)

Abstract

This paper investigates how a buyer and a seller exchanging two goods should write the contract, where the seller makes sequences of unobservable relation-specific investments and the buyer privately learns valuations for goods which are stochastically influenced by the investments and these two types of asymmetric information cause inefficiency in trading. Three types of contract structures are possible. In a dynamic contract, the goods are traded sequentially and the order for the second good can be canceled to restore efficiency for the first good. In separate contracts, two goods are treated independently, whereas the two goods are bundled as a single good in bundled contracts. It will be shown that the dynamic contract is suboptimal and that the second-best contract is either a separate or a bundle contract, depending on the costs of investments.

Suggested Citation

  • Kazumi Hori, 2014. "Contracting for Multiple Goods under Asymmetric Information: The Two-goods Case," KIER Working Papers 888, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:888
    as

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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP888.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    bilateral trading; cooperative investment; dynamic contract; hidden action; hidden information.;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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