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on Contract Theory and Applications |
| By: | Jo\~ao Thereze (Fuqua School of Business, Duke University); Udayan Vaidya (Fuqua School of Business, Duke University) |
| Abstract: | A principal seeks to contract with an agent but must do so through an informed delegate. Although the principal cannot directly mediate the interaction, she can constrain the menus of contracts the delegate may offer. We show that the principal can implement any outcome that is implementable through a direct mechanism satisfying dominant strategy incentive compatibility and ex-post participation for the agent. We apply this result to several settings. First, we show that a government that delegates procurement to a budget-indulgent agency should delegate an interval of screening contracts. Second, we show that a seller can delegate sales to an intermediary without revenue loss, provided she can commit to a return policy. Third, in contrast to centralized mechanism design, we demonstrate that no partnership can be efficiently dissolved in the absence of a mediator. Finally, we discuss when delegated contracting obstructs efficiency, and when choosing the right delegate may help restore it. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.19326 |
| By: | Guillermo Alonso Alvarez; Erhan Bayraktar; Ibrahim Ekren |
| Abstract: | We study a principal-agent model involving a large population of heterogeneously interacting agents. By extending the existing methods, we find the optimal contracts assuming a continuum of agents, and show that, when the number of agents is sufficiently large, the optimal contracts for the problem with a continuum of agents are near-optimal for the finite agents problem. We make comparative statistics and provide numerical simulations to analyze how the agents' connectivity affects the principal's value, the effort of the agents, and the optimal contracts. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.09415 |
| By: | Zhonghong Kuang; Yi Liu; Dong Wei |
| Abstract: | We study the optimal design of relational contracts that incentivize an expert to share specialized knowledge with a novice. While the expert fears that a more knowledgeable novice may later erode his future rents, a third-party principal is willing to allocate her resources to facilitate knowledge transfer. In the unique profit-maximizing contract between the principal and the expert, the expert is asked to train the novice as much as possible, for free, in the initial period; knowledge transfers then proceed gradually and perpetually, with the principal always compensating the expert for his future losses immediately upon verifying the training he provided; even in the long run, a complete knowledge transfer might not be attainable. We further extend our analysis to an overlapping-generation model, accounting for the retirement of experts and the career progression of novices. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.11018 |
| By: | Olivier Bos; Nicolas Fugger; Sander Onderstal |
| Abstract: | We investigate profit-share auctions in a procurement context, comparing them with traditional cash auctions to identify which mechanism yields lower expenses for buyers. We also explore whether specifying a high project value in profit-share auction contracts influences supplier bidding behavior. Using theoretical analysis and experimental methods, we observe that profit-share auctions lead to lower buyer expenses compared to traditional cash auctions. Furthermore, we find that the buyer benefits from specifying a high project value in the contract, as this commitment induces more aggressive bidding from the suppliers. While profit-share auctions result in significantly lower buyer expenses than cash auctions, the observed differences are smaller than predicted. This discrepancy is due to (i) more pronounced underbidding in cash auctions and (ii) lower efficiency in profit-share auctions caused by noisy bidding. Our findings suggest that managers can reduce procurement costs by adopting profit-share auctions and strategically committing to a high project value in contracts. However, they should be aware that real-world savings may be smaller than theoretically predicted due to supplier bidding behavior. |
| Keywords: | procurement, profit-share auctions, experiment |
| JEL: | D44 C92 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12071 |
| By: | José Ignacio Cuesta; Pietro Tebaldi |
| Abstract: | A common approach to markets with adverse selection is to regulate competition to minimize inefficiencies, while preserving consumer choice among firms. We study the role of procurement auctions—leading to sole provision by the winning firm—as an alternative market design. Relative to regulated competition, auctions affect product variety, quality, markups, and remove cream-skimming incentives. We develop a framework to study this comparison and apply it to individual health insurance in the US. We find that procurement auctions would increase consumer welfare in most markets, mainly by limiting inefficiencies from adverse selection and market power, and by increasing quality. |
| JEL: | H42 I13 L13 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34141 |