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on Contract Theory and Applications |
| By: | Peiran Xiao |
| Abstract: | I study the optimal design of performance or product ratings to motivate agents' performance or investment in product quality. The principal designs a rating that maps their quality (performance) to possibly stochastic scores. Agents have private information about their abilities (cost of effort/quality) and choose their quality. The market observes the scores and offers a wage equal to the agent's expected quality [resp. ability]. I first show that an incentive-compatible interim wage function can be induced by a rating (i.e., feasible) if and only if it is a mean-preserving spread of quality [resp. ability]. Thus, I reduce the principal's rating design problem to the design of a feasible interim wage. When restricted to deterministic ratings, the optimal rating design is equivalent to the optimal delegation with participation constraints (Amador and Bagwell, 2022). Using optimal control theory, I provide necessary and sufficient conditions under which lower censorship, and particularly a simple pass/fail test, are optimal within deterministic ratings. In particular, when the principal elicits maximal effort (quality), lower censorship [resp. pass/fail] is optimal if the density is unimodal [resp. increasing]. I also solve for the optimal deterministic ratings beyond lower censorship for general distributions and preferences. For general ratings, I provide sufficient conditions under which lower censorship remains optimal. In the effort-maximizing case, a pass/fail test remains optimal if the density is increasing. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.10525 |
| By: | Gorkem Celik; Roland Strausz |
| Abstract: | We consider a monopolistic certifier selling certification services to a partially privately informed seller. The certifier can enable the seller to disclose her private information publicly, as well as gather additional market information about the good's quality publicly. We show that the certifier's optimal contract exhibits maximal disclosure but non-maximal information-gathering. Thus, optimal contracts eliminate private information but not market uncertainty; even though the latter would be costless, it is suboptimal as it requires excessive information rents to the seller. Thus, market inefficiencies remain due to market uncertainty but not due to private information. |
| Keywords: | certification, disclosure, information gathering, optimal information revelation, private information |
| JEL: | D82 |
| Date: | 2024–08–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0045 |
| By: | Ollar, Mariann; Penta, Antonio |
| Abstract: | We study a framework for robust mechanism design that can accommodate various degrees of robustness with respect to agents’ beliefs, and which includes both the belief-free and Bayesian settings as special cases. For general belief restrictions, we characterize the set of incentive compatible direct mechanisms in general environments with interdependent values. The necessary conditions that we identify, based on a first-order approach, provide a unified view of several known results, as well as novel ones, including a robust version of the revenue equivalence theorem that holds under a notion of generalized independence that also applies to non-Bayesian settings. Our main characterizations informthe design of belief-based terms, in pursuit of various objectives in mechanism design, including attaining incentive compatibility in environments that violate standard single-crossing and monotonicity conditions. We discuss several implications of these results. For instance, we show that, under weak conditions on the belief restrictions, any allocation rule can be implemented, but full rent extraction need not follow. Information rents are generally possible, and they decrease monotonically as the robustness requirements are weakened. |
| Keywords: | Moment Conditions; Robust Mechanism Design; Incentive Compatibility; Interdependent Values; Belief Restrictions |
| JEL: | D62 D82 D83 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:129650 |