efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

reciprocal relationships and mechanism design we study an incomplete information game in which players can coordinate their actions by contracting among themselves we model this relationship as a reciprocal contracting procedure where each player has the ability to make commitments contingent on the other players commitments we differ from the rest of the literature on reciprocal contracting by assuming that punishments cannot be enforced in the event that cooperation breaks down we fully characterize the outcomes that can be supported as perfect bayesian equilibrium outcomes in such an environment we use our characterization to show that the set of supportable outcomes with reciprocal contracting is larger than the set of outcomes available in a centralized mechanism design environment in which the mechanism designer is constrained by his inability to enforce punishments against non participants the difference stems from the players ability in our contracting game to convey partial information about their types at the time they offer contracts we discuss the implications of our analysis for modelling collusion between multiple agents interacting with the same principal

contracts as a barrier to entry it is shown that an incumbent seller who faces a threat of entry into his or her market will sign long term contracts that prevent the entry of some lower cost producers even though they do not preclude entry completely moreover when a seller possesses superior information about the likelihood of entry it is shown that the length of the contract may act as a signal of the true probability of entry

information revelation incentives and the value of a real option the real options approach to capital budgeting focuses on valuing benefits of project flexibility this paper presents an incentive consideration in such valuation operating flexibility not only allows a firm to change course in response to new information but also allows interested observers to make inferences based on the change in course or lack thereof such information conveyance through refined operating choices can alter observers incentives as a result an option to delay may prove valuable because it allows a firm to prolong informational advantages

the licensing of patents under asymmetric information abstract this paper seeks to explain the use of royalty payments rather than fixed fees in the licensing of patents by the presence of asymmetric information the licensee is assumed to know the value of the patent and makes a single offer of a contract to the licensor it is shown that there is a unique equillibrium satisfying cho and kreps intuitive criterion qualitative properties of the equilibrium contract are derived by considering a continuum of types

collusion under asymmetric information when applied to groups the revelation principle postulates a bayesian nash behavior between agents their binding agreements are unenforceable or the principal can prevent them at no cost we analyze instead a mechanism design problem in which the agents can communicate between themselves and collude under asymmetric information we characterize the set of implementable collusion proof contracts both when the principal offers anonymous and nonanonymous contracts after having isolated the nexi and the stakes of collusion we proceed to a normative analysis perform some comparative statics discuss our concept of collusion proofness and provide some insights about transaction costs in side contracting

the principal agent relationship with an informed principal ii common values in many circumstances a principal may have relevant private information when she proposes a contract to an agent we analyze such a principal agent relationship as a noncooperative game the principal proposes a contract which is accepted or rejected by the agent who for most of our analysis has no private information the contract is executed if accepted otherwise the reservation allocation takes effect this allocation may be determined by a pre existing contract which the principal by her proposal is attempting to renegotiate or it may simply be the no trade point in this paper we assume that the principal s information directly affects the agent s payoff before solving the game we discuss pareto efficiency with asymmetric information we define an incentive compatible allocation to be weakly interim efficient wie if there exists no alternative incentive compatible allocation that both parties prefer for all possible beliefs that the agent might have about the principal s private information type we show that any wie allocation is interim efficient ie for some beliefs the rothschild stiglitz wilson rsw allocation relative to the reservation allocation l is the allocation that maximizes the payoff of each type of principal within the class of incentive compatible allocations that guarantee the agent at least the utility he gets from a irrespective of his beliefs about the principal s type the equilibrium set of the contract proposal game consists of the allocations that weakly pareto dominate the rsw allocation thus there is a unique equilibrium outcome if and only if the latter is ie and the equilibrium outcome is the rsw allocation itself after characterizing the equilibrium allocations we study those that are renegotiation proof when either the principal or the agent leads the renegotiation we then compare our contract proposal game which is a signaling model with its screening counterpart we conclude by extending our results to the case in which the agent as well as the principal has private information under the assumption of quasi linear preferences

favoritism and reverse discrimination abstract we analyze the inefficiency that may arise in the form of reverse discrimination in the presence of favoritism or nepotism favoritism is typically associated with inefficient transfers to the core support of the incumbent government but inefficiency that is opposite in nature may also arise through the electoral process in a political environment where favoritism is pervasive we show that if the policy maker is sufficiently office seeking a socially efficient action may never be taken if it yields benefits to his core support due to reputational concerns hence the core support of the incumbent may fare worse than other groups we also consider the implications of policies such as anti nepotism laws or term limits in the presence of favoritism

collusion and signaling in auctions with interdependent values abstract the standard approach to collusion in auctions posits an uninformed disinterested third party who prior to the auction designs and implements a collusive mechanism in environments where collusion agreements are likely to be both proposed and executed by the involved parties this approach may neglect information leakages from simply a proposal to collude we consider a model of collusion where one informed bidder proposes to another as in es and schummer 2004 we allow for general interdependent values and affiliated signals in contrast to third party modeling approaches collusion is inefficient from both a social perspective except for the case of pure common values and from the perspective of the ring both bidders are better off than without colluding but the surplus extracted from the seller is distributed asymmetrically between the bidders the potential for information leakage from proposing is bad for low types who reveal that they are weak competitors but is advantageous for high types because they are able to signal their strength we identify a so called briber s curse whereby acceptance of a proposal causes the proposer to downgrade her expected value for the object when there is additional competition in the form of bidders outside of the cartel the briber s curse significantly harms cartel profits and raises seller revenues

matching markets with adverse selection abstract this paper considers a market with adverse selection in the spirit of rothschild and stiglitz quart j econ 90 1976 629 the major departure from existing approaches is that we model a decentralized market that is open ended and constantly refilled by new participants e g by new workers and firms in the case of a labor market the major novelty of this approach is that the distribution of types in the market becomes an endogenous variable which is jointly determined with equilibrium contracts as frictions become small we show that the least cost separating contracts are always supported as an equilibrium outcome regardless of the distribution of types among entrants moreover we derive conditions under which this outcome is also unique

a non cooperative bargaining theory with incomplete information verifiable types abstract we consider a non cooperative sequential bargaining game with incomplete information where two players negotiate for mechanisms with ex post verifiable types at the interim stage we prove the existence of a stationary sequential equilibrium of the bargaining game where the ex post nash bargaining solution with no delay is asymptotically implemented with probability one further the ex post nash bargaining solution is a unique outcome of a stationary equilibrium under the property of independence of irrelevant types iit whereby the response of every type of a player is independent of allocations proposed to his other types and under a self selection property of their belief

signaling and the design of delegated management contracts for public utilities this article analyzes the shape of contracts between local governments and the contractors they hire to run public facilities on their behalf governments are privately informed about the quality of the facility while risk neutral contractors undertake a non verifiable operating eort the design of the contract signals the quality of the facility in such a way that the better this quality the greater the share of operating risk kept by the government this feature reduces the agent s marginal incentives creating a trade o between signaling and moral hazard we provide extensions of our framework in several directions allowing for risk aversion on the agent s side double moral hazard and political delegation the model is supported by some stylized facts from the water industry

incentive schemes as a signaling device abstract this paper considers a model of moral hazard where the principal has private information for instance in an organizational setting the firm may be better informed about the profitability of a sales area for which it seeks to employ a new sales representative we show how this information asymmetry may lead to a game of signaling which can mute incentives

interim third party selection in bargaining abstract third party intervention can reduce the risk of conflict in situations where the bargaining failure is due to asymmetric information in this paper i consider the selection of a third party in a two person bargaining problem where each disputant has private information about its relative strength or weakness for a class of problems i find that the disputants choose the third party that is best for the strong type but worst for the weak type due to the incentive of each disputant to avoid seeming weak to their adversary the selected third party s intervention entails a higher ex ante chance of conflict than intervention by any other alternative this paper shows how the process of interim third party selection can have important consequences for the outcome of a third party intervention in bargaining

monopoly with incomplete information recent theoretical research on principal agent relationships has emphasized incentive problems that arise when the parties involved are constrained by either asymmetric information or their inability to monitor each other s actions here we concentrate on the former constraint and consider the case of a single principal the monopolist the main contribution is to show that under a separability assumption strong conclusions can be drawn about the nature of optimal incentive schemes although the primary focus is on optimal quantity discounts in a monopolized market the results also shed light on related topics such as optimal income taxation and commodity bundling

price discovery in a matching and bargaining market with aggregate uncertainty abstract we introduce aggregate uncertainty into a rubinstein and wolinsky 1985 type dynamic matching and bilateral bargaining model the market can be either in a high state where there are more buyers than sellers or in a low state where there are more sellers than buyers traders do not know the state they randomly meet each other and bargain by making take it or leave it offers the only information transmitted in a meeting is the time a trader spent on the market there are two kinds of search frictions time discounting and exogenous exit we find that as the search frictions vanish the market discovers the competitive price quickly the prices offered in equilibrium converge in expectation to the true state walrasian price at the rate linear in the total search friction this rate is the same as it would be if the state were commonly known

contract theory and implications for perennial energy crop contracting abstract this article provides an overview of modern contract theory and discusses the implications of the theory for contracting for perennial dedicated energy crops we discuss some of the unique challenges of contracting for dedicated energy crops used for the production of advanced biofuels and survey some of the relevant concepts and research from the contract theory literature to address these challenges we focus primarily on the mechanism design or complete contracts approach to contracting which involves optimizing some objective function e g profits costs etc with respect to contract terms subject to important incentive constraints the solution to these optimization problems typically highlight important tradeoffs that a contract designer needs to consider in order to maximize profits and or minimize costs

adverse selection and renegotiation in procurement as was shown by dewatripont optimal long term contracts are generally not sequentially optimal the parties ex post renegotiate them to their mutual advantage this paper fully characterizes the equilibrium of a simple two period procurement situation and studies the extent to which renegotiation reduces ex ante welfare i a central result is that like in the non commitment case the second period allocation is optimal for the principal conditionally on his posterior beliefs about the agent ii the first period allocation exhibits an increasing amount of pooling when the discount factor grows iii with a continuum of types it is never optimal to induce full separation the paper also analyzes whether renegotiated long term contracts yield outcomes resembling those under either unnegotiated long term contracts or a sequence of short term contracts and it links the analysis with the multiple unit durable good monopoly problem

contract renegotiation and coasian dynamics consider a long term relationship between a seller and a buyer whose valuation for a per period service or a durable good is private as trade progresses the valuation will be partially revealed and it may be impossible for the parties to commit ex ante not to take advantage of this we analyse this situation first by supposing that the parties can sign a sequence of short term contracts and secondly by supposing that they can sign a long term contract but cannot commit not to renegotiate it later we find a close relationship in the second case between the optimal long term contract and the non commitment outcome in the standard coasian durable good model our results also have implications for hidden information principal agent models

moral hazard in corporate investment and the disciplinary role of voluntary capital rationing this paper compares three capital budgeting rules the npv rule a high hurdle rate and capital rationing and explains why some firms may voluntarily impose capital rationing under both capital rationing and a high hurdle a restrictive investment criterion is used to control managerial shirking however implementation of these budgeting rules requires a mechanism to prevent the firm from expanding the investment scale ex post capital rationing in the form of a predetermined fixed budget differs from the high hurdle rate rule in that the former requires the firm to overcome the cost of raising additional capital before making further investment

loan commitments and the debt overhang problem the debt overhang problem is shown to arise in the context of an entrepreneurial project that requires a sequence of investments financed by an outside lender the entrepreneur not internalizing losses accruing to the lender which financed the initial investments may inefficiently cancel the project and instead pursue an outside opportunity it is shown that loan commitments contracts that allow the entrepreneur to borrow a variable amount at a set interest rate in return for a fixed fee are the optimal financial contracts in this setting strictly dominating standard debt the existence of the fixed fee allows loan commitments to set a relatively low interest rate improving the entrepreneur s incentives to continue the project the paper specifies the optimal contract fully derives robust comparative statics properties using an extension of milgrom and roberts 1994 and extends the results to more realistic settings e g allowing the market risk free rate to be stochastic

optimal regulation of multinationals under collusion this paper analyses the optimal collusion proof mechanism for the regulation of multinational firms mnfs in foreign direct investment fdi projects there is a host country with a profitable investment opportunity either a multinational firm mnf or a local firm lf can undertake this project nonetheless due to its firm specific advantage and the mnf has the potential to create a larger surplus the host government faces an informational constraint such that it cannot observe the extra surplus the mnf can generate using this set up karabay 2010 shows that employing foreign ownership restrictions to force a joint venture jv can help the host government to partially overcome its information disadvantage in this paper we extend karabay 2010 by studying the host government s optimal regulatory policy when the mnf and the lf can collude it turns out collusion imposes no cost on the host government and the expected welfare attained in the absence of collusion can still be secured under collusion

entrepreneurs and new ideas we study how early stage new ideas are turned into successful businesses even promising ideas can be unprofitable if they fail on one dimension such as technical feasibility correspondence to market demand legality or patentability to screen good ideas the entrepreneur needs to hire experts who evaluate the idea along their dimensions of expertise sharing the idea however creates the risk that the expert would steal it yet the idea thief cannot contact any other expert lest he should in turn steal the idea thus stealing leads to incomplete screening and is unattractive if the information of the other expert is critical and highly complementary in such cases the entrepreneur can form a partnership with the experts thus granting them the advantage of accessing each other s information yet very valuable ideas cannot be shared because it is too tempting to steal them