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on Contract Theory and Applications |
| By: | Ashwin Kambhampati (United States Naval Academy); Bo Peng (Shanghai University of Finance and Economics); Zhihao Gavin Tang (Shanghai University of Finance and Economics); Juuso Toikka (University of Pennsylvania); Rakesh Vohra (University of Pennsylvania) |
| Abstract: | We consider a principal-agent model with moral hazard, bilateral risk-neutrality, and limited liability. The principal knows only some of the actions the agent can take and evaluates contracts by their guaranteed payoff over possible unknown actions. We show that linear contracts are a robustly optimal way to incentivize the agent: any randomization over contracts can be improved by making each contract in its support linear. We then identify an optimal random linear contract characterized by a single parameter that bounds its continuous support. Several corollaries arise: the gain from randomization can be arbitrarily large; optimal randomization does not require commitment; and screening cannot improve the principal’s guarantee. |
| Date: | 2025–02–06 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:25-004 |
| By: | Tymofiy Mylovanov; Thomas Tröger |
| Abstract: | A mechanism proposal by a privately informed principal is a signal. The agents' belief updating endogenizes their incentives in the mechanism, implying that such design problems cannot be solved via optimizing subject to incentive constraints. We propose a solution, neo-optimum, that can be interpreted as principal-preferred perfect-Bayesian equilibrium. Its neologism-based definition allows an intuitive computation, as we demonstrate in several applications. Neo-optimum connects the two main established approaches to the problem, by Myerson and by Maskin-Tirole. Any Myerson neutral optimum is a neo-optimum, implying that a neo-optimum generally exists. In private-values environments, neo-optimum is equivalent to strong unconstrained Pareto optimum (Maskin-Tirole) and strong neologism-proofness (Mylovanov-Tröger). In information-design settings, any interim-optimum (Koessler-Skreta) is a neo-optimum. Our methods can be used to reconstruct the perfect-Bayesian equilibria in the informed-principal literature. |
| Keywords: | mechanism-design, informed-principal, neologism |
| JEL: | D47 D82 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_643 |
| By: | Lefouili, Yassine; Madio, Leonardo |
| Abstract: | In this paper, we review recent studies on the impact of mergers on investments. First, we examine how mergers among competing incumbents influence firms' incentives to develop new products and undertake cost-reducing or quality-enhancing investments. Second, we analyze how an incumbent's acquisition of an innovative entrant affects the investment incentives of both parties. Third, we discuss the effects of vertical mergers on the investment decisions of both upstream and downstream firms. Finally, we outline a few directions for future research. |
| Keywords: | Competition; Investments; Innovation; Mergers, Entry |
| JEL: | D43 L13 L40 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:130332 |
| By: | Matteo Camboni; Mingzi Niu; Mallesh M. Pai; Rakesh Vohra |
| Abstract: | We revisit the classic job-market signaling model of \cite{spence1973job}, introducing profit-seeking schools as intermediaries that design the mapping from candidates' efforts to job-market signals. Each school commits to an attendance fee and a monitoring policy. We show that, in equilibrium, a monopolist school captures the entire social surplus by committing to low information signals and charging fees that extract students' surplus from being hired. In contrast, competition shifts surplus to students, with schools vying to attract high-ability students, enabling them to distinguish themselves from their lower-ability peers. However, this increased signal informativeness leads to more wasteful effort in equilibrium, contrasting with the usual argument that competition enhances social efficiency. This result may be reversed if schools face binding fee caps or students are credit-constrained. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.02328 |