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Optimal contracting with private information on cost expectation and variability

  • Daniel Danau
  • Annalisa Vinella

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 specifi?c set of relevant incentive constraints, and so the characteristics of the optimal mechanism, depend ?finely 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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Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 1007.

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Date of creation: Jul 2010
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Handle: RePEc:san:crieff:1007
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  1. Yeon-Koo Che, 1993. "Design Competition through Multidimensional Auctions," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 668-680, Winter.
  2. John Asker & Estelle Cantillon, 2010. "Procurement when Price and Quality Matter," ULB Institutional Repository 2013/99378, ULB -- Universite Libre de Bruxelles.
  3. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-87, June.
  4. Courty, Pascal & Li, Hao, 2000. "Sequential Screening," Review of Economic Studies, Wiley Blackwell, vol. 67(4), pages 697-717, October.
  5. 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.
  6. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
  7. Spulber, Daniel F, 1990. "Auctions and Contract Enforcement," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(2), pages 325-44, Fall.
  8. Miravete, Eugenio J, 1996. "Screening Consumers through Alternative Pricing Mechanisms," Journal of Regulatory Economics, Springer, vol. 9(2), pages 111-32, March.
  9. 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.
  10. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
  11. Armstrong, Mark, 1999. "Optimal Regulation with Unknown Demand and Cost Functions," Journal of Economic Theory, Elsevier, vol. 84(2), pages 196-215, February.
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