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Gathering Information Before Signing a Contract

  • Cremer, J.
  • Khalil, F.

After being offered a contract, an agent has the possibility to observe the state of nature. This enables him to refuse the contract in unfavorable states but burdens him with an observation cost. The authors show that the principal offers a contract in which the agent has no incentive to observe the state of nature and they explore its terms. Later, they show that the principal finds it profitable to organize competition between several agents, even though he has monopoly power and can push a single agent down to his reservation utility. Copyright 1992 by American Economic Association.

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Paper provided by University of Washington, Department of Economics in its series Working Papers with number 91-16.

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Length: 21 pages
Date of creation: 1991
Date of revision:
Handle: RePEc:udb:wpaper:91-16
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  1. Yeon-Koo Che & Ian Gale, 2000. "Optimal Design of Research Contests," Econometric Society World Congress 2000 Contributed Papers 1784, Econometric Society.
  2. William Fuchs, 2005. "Contracting with Repeated Moral Hazard and Private Evaluations," Game Theory and Information 0511007, EconWPA.
  3. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
  4. Patrick Bajari & Steven Tadelis, 1999. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," Working Papers 99029, Stanford University, Department of Economics.
  5. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November.
  6. Paul Milgrom & John Roberts, 1980. "Predation, Reputation, and Entry Deterrence," Discussion Papers 427, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
  8. B. Douglas Bernheim & Michael D. Whinston, 1997. "Incomplete Contracts and Strategic Ambiguity," Harvard Institute of Economic Research Working Papers 1787, Harvard - Institute of Economic Research.
  9. Blonski, Matthias & Spagnolo, Giancarlo, 2002. "Relational Contracts and Property Rights," CEPR Discussion Papers 3460, C.E.P.R. Discussion Papers.
  10. Taylor, Curtis R, 1995. "Digging for Golden Carrots: An Analysis of Research Tournaments," American Economic Review, American Economic Association, vol. 85(4), pages 872-90, September.
  11. Aoyagi, Masaki, 2003. "Bid rotation and collusion in repeated auctions," Journal of Economic Theory, Elsevier, vol. 112(1), pages 79-105, September.
  12. Richard L. Fullerton & R. Preston McAfee, 1999. "Auctioning Entry into Tournaments," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 573-605, June.
  13. W. Bentley MacLeod & James M. Malcomson, 1986. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Working Papers 585, Queen's University, Department of Economics.
  14. MacLeod, W.B. & Malcomson, J.M., 1997. "Motivation and markets," Discussion Paper Series In Economics And Econometrics 9720, Economics Division, School of Social Sciences, University of Southampton.
  15. Bar-Isaac, Heski, 2005. "Imperfect competition and reputational commitment," Economics Letters, Elsevier, vol. 89(2), pages 167-173, November.
  16. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1125-56, November.
  17. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts And The Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 39-84, February.
  18. Che,Y.K. & Yoo,S.W., 1998. "Optimal incentives for teams," Working papers 8, Wisconsin Madison - Social Systems.
  19. Olivier Compte, 1998. "Communication in Repeated Games with Imperfect Private Monitoring," Econometrica, Econometric Society, vol. 66(3), pages 597-626, May.
  20. repec:mul:je8794:doi:10.1429/20210:y:2005:i:2:p:307 is not listed on IDEAS
  21. Brown, Martin & Falk, Armin & Fehr, Ernst, 2003. "Relational Contracts and the Nature of Market Interactions," IZA Discussion Papers 897, Institute for the Study of Labor (IZA).
  22. Jonathan Levin, 2000. "Relational Incentive Contracts," Working Papers 01002, Stanford University, Department of Economics.
  23. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
  24. Franklin Allen, 1984. "Reputation and Product Quality," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 311-327, Autumn.
  25. Maija Halonen, 2002. "Reputation And The Allocation Of Ownership," Economic Journal, Royal Economic Society, vol. 112(481), pages 539-558, July.
  26. Pearce, David G. & Stacchetti, Ennio, 1998. "The Interaction of Implicit and Explicit Contracts in Repeated Agency," Games and Economic Behavior, Elsevier, vol. 23(1), pages 75-96, April.
  27. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-94, March.
  28. Rachel E. Kranton, 2003. "Competition and the Incentive to Produce High Quality," Economica, London School of Economics and Political Science, vol. 70(279), pages 385-404, 08.
  29. Alejandro M. Manelli & Daniel R. Vincent, 1992. "Optimal Procurement Mechanisms," Discussion Papers 999, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  30. Bull, Clive, 1987. "The Existence of Self-Enforcing Implicit Contracts," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 147-59, February.
  31. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
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