nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2022‒09‒26
five papers chosen by
Guillem Roig
University of Melbourne

  1. Bidding for Contracts under Uncertain Demand: Skewed Bidding and Risk Sharing By Yao Luo; Hidenori Takahashi
  2. Screening With Frames: Implementation in Extensive Form By Franz Ostrizek; Denis Shishkin
  3. Optimal Coordination in Generalized Principal-Agent Problems: A Revisit and Extensions By Jiarui Gan; Minbiao Han; Jibang Wu; Haifeng Xu
  4. Optimal Delegation in a Multidimensional World By Andreas Kleiner
  5. Simultaneous Search and Adverse Selection By Sarah Auster; Piero Gottardi; Ronald Wolthoff

  1. By: Yao Luo; Hidenori Takahashi
    Abstract: Procurement projects often involve substantial uncertainty in inputs at the time of contracting. Whether the procurer or contractor assumes such risk depends on the specific contractual agreement. We develop a model of auction contracts where bidders have multidimensional private information. Bidders balance skewed bidding and risk exposure; both efficient and inefficient bidders submit a low bid via skewed bidding. We document evidence of i) risk-balancing behavior through bid portfolio formation and ii) opportunistic behavior via skewed bidding using auction data. Counterfactual experiments suggest the onus of bearing project risk should fall on the procurer (contractor) when project risk is large (small).
    Keywords: Contract, Unit-Price, Fixed-Price, Portfolio, Cost Overrun, Procurement, Scoring Auction
    JEL: L5
    Date: 2022–09–01
  2. By: Franz Ostrizek; Denis Shishkin
    Abstract: We study a decision-framing design problem: a principal faces an agent with frame-dependent preferences and designs an extensive form with a frame at each stage. This allows the principal to circumvent incentive compatibility constraints by inducing dynamically inconsistent choices of the sophisticated agent. We show that a vector of contracts can be implemented if and only if it can be implemented using a canonical extensive form, which has a simple high-low-high structure using only three stages and the two highest frames, and employs unchosen decoy contracts to deter deviations. We then turn to the study of optimal contracts in the context of the classic monopolistic screening problem and establish the existence of a canonical optimal mechanism, even though our implementability result does not directly apply. In the presence of naive types, the principal can perfectly screen by cognitive type and extract full surplus from naifs.
    Keywords: Implementation, Screening, Framing, Extensive-Form Decision Problems, Dynamic Inconsistency, Sophistication, Naivete
    JEL: D42 D82 D90 L12
    Date: 2022–08
  3. By: Jiarui Gan; Minbiao Han; Jibang Wu; Haifeng Xu
    Abstract: In the principal-agent problem formulated in [Myerson 1982], agents have private information (type) and make private decisions (action), both of which are unobservable to the principal. Myerson pointed out an elegant solution that relies on the revelation principle, which states that without loss of generality optimal coordination mechanisms of this problem can be assumed to be truthful and direct. Consequently, the problem can be solved by a linear program when the support sets of the action and type spaces are finite. In this paper, we extend Myerson's results to the setting where the principal's action space might be infinite and subject to additional design constraints. This generalized principal-agent model unifies several important design problems -- including contract design, information design, and Bayesian Stackelberg games -- and encompasses them as special cases. We present a revelation principle for this general model, based on which a polynomial-time algorithm is derived for computing the optimal coordination mechanism. This algorithm not only implies new efficient algorithms simultaneously for all the aforementioned special cases but also significantly simplifies previous approaches in the literature.
    Date: 2022–09
  4. By: Andreas Kleiner
    Abstract: We study a model of delegation in which a principal takes a multidimensional action and an agent has private information about a multidimensional state of the world. The principal can design any direct mechanism, including stochastic ones. We provide necessary and sufficient conditions for an arbitrary mechanism to maximize the principal's expected payoff. We also discuss simple conditions which ensure that some convex delegation set is optimal. A key step of our analysis shows that a mechanism is incentive compatible if and only if its induced indirect utility is convex and lies below the agent's first-best payoff.
    Date: 2022–08
  5. By: Sarah Auster; Piero Gottardi; Ronald Wolthoff
    Abstract: We study the effect of diminishing search frictions in markets with adverse selection by presenting a model in which agents with private information can simultaneously contact multiple trading partners. We highlight a new trade-off: facilitating contacts reduces coordination frictions but also the ability to screen agents' types. We find that, when agents can contact sufficiently many trading partners, fully separating equilibria obtain only if adverse selection is sufficiently severe. When this condition fails, equilibria feature partial pooling and multiple equilibria co-exist. In the limit, as the number of contacts becomes large, some of the equilibria converge to the competitive outcomes of Akerlof (1970), including Pareto dominated ones; other pooling equilibria continue to feature frictional trade in the limit, where entry is inefficiently high. Our findings provide a basis to assess the effects of recent technological innovations which have made meetings easier.
    Keywords: Directed Search, Adverse Selection
    JEL: D82 D83
    Date: 2022–09

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