Games Played in a Contracting Environment

We analyze situations where a player must contract with the monopoly supplier of an essential input in order to play an action in a strategic form game. Supplier monopoly power does not distort the equilibrium distribution over player actions under private contracting, but may dramatically affect the equilibrium actions under public contracting. When \ a player randomizes between actions, suppliers for the different actions behave as though they are producing perfect substitutes when contracts are private; when contracts are public, it is as though they are producing perfect complements.

Games Played in a Contracting Environment

We analyze situations where a player must contract with the monopoly supplier of an essential input in order to play an action in a strategic form game. Supplier monopoly power does not distort the equilibrium distribution over player actions under private contracting, but may dramatically affect the equilibrium actions under public contracting. When a player randomizes between actions, suppliers for the different actions behave as though they are producing perfect substitutes when contracts are private; when contracts are public, it is as though they are producing perfect complements

Commitment and Observability in an Economic Environment

Bagwell (1995) argues that commitment in undermined by the slightest imperfectness in observation. Guth, Ritzberger & Kirchsteiger (1998) question this assertion: for any finite leader-follower game, with arbitrary many players in each role and generic payoffs, they show that there always exists a subgame perfect equilibrium outcome that is accessible, i.e. it can be approximated by the outcome of a mixed equilibrium of the game with imperfect observation. We show that accessibility fails in a class of games played in economic environments, where the payoffs to commitment actions depend upon prices set by other agents, prices being chosen from a continuum. Accessibility requires either that commitment is not required or that the price setting agents have no monopoly power. Our result follows from a generalized indifference principle which mixed strategies must satisfy in such economic environments.

Trust and Reciprocity in Incentive Contracting

Principals can attempt to get agents to perform certain actions preferable to the principal by using ex post}punishments and rewards to align incentives. Field data is mixed on whether, and to what extent, such informal incentive contracting (paradoxically) crowds out efficient solutions to the agency problem. This paper explores, via a novel set of laboratory experiments, the impact of ex post incentives on informal contracts between principals and agents in bargaining environments in which there are gains from exchange and when there is an opportunity for the principal to relay a no-cost demand of the division of those gains. Incentive contracting in these environments does not crowd-out off- equilibrium cooperation, and at high incentive levels cooperation is crowded in.incentives, principal-agent, bargaining, trust, cooperation, punishment, reward

Three Principles of Competitive Nonlinear Pricing.

We make three contributions to the theory of contracting under asymmetric information. First, we establish a competitive revelation principle for contracting games in which several principals compete for one privately informed agent. In particular, we show that given any profile of incentive compatible indirect contracting mechanisms, there exists an incentive compatible direct contracting mechanism which in all circumstances generates the same contract selection as the profile of indirect mechanisms. Second, we establish a competitive taxation principle.INFORMATION ; GAMES ; TAXATION

Trust and reciprocity in incentive contracting

Principals can attempt to get agents to perform certain actions preferable to the principal by using ex post punishments or rewards to align incentives. Field data is mixed on whether, and to what extent, such informal incentive contracting (paradoxically) crowds out efficient solutions to the agency problem. This paper explores, via a novel set of laboratory experiments, the impact of ex post incentives on informal contracts between principals and agents in bargaining environments in which there are gains from exchange and when there is an opportunity for the principal to relay a no-cost demand of the division of those gains. Incentive contracting in these environments does not crowd-out off-equilibrium cooperation, and at high incentive levels cooperation is crowded in.incentives; trust; reciprocity; organizations; experimental economics

On the Revelation Principle and Reciprocal Mechanisms in Competing Mechanism Games

This paper provides a set of mechanisms that we refer to as emph{reciprocal mechanisms. }These mechanisms have the property that every outcome that can be supported as a Bayesian equilibrium in a competing mechanism game can be supported as an equilibrium in reciprocal mechanisms. In this sense, reciprocal mechanisms play the same role as direct mechanisms do in single principal problems. The advantage of these mechanisms over alternatives like the universal set of mechanisms is that they are conceptually straightforward and no more difficult to deal with than the simple direct mechanisms used in single principal mechanism design.competing mechanisms, revelation principle

The Threat of Exclusion and Relational Contracting

Relational contracts have been shown to mitigate moral hazard in labor and credit markets. A central assumption in most theoretical and experimental studies is that, upon misbehaving, agents can be excluded from their current source of income and have to resort to less attractive outside options. This threat of exclusion is unrealistic in many environments, and especially in credit and investment contexts. We examine experimentally the emergence and time structure of relational contracts when the threat of exclusion is weakened. We focus on bilateral credit relationships in which strategic default is possible. We compare a weak exclusion treatment in which defaulting borrowers can reinvest borrowed funds, to a strong exclusion treatment in which defaulting borrowers must liquidate borrowed funds. We find that under weak exclusion more relationships break down in early periods and credit relationships are more likely to “start small”

Strategic Effects of Incomplete and Renegotiation-Proof Contracts

It is well known that non-renegotiable contracts with third parties may have an effect on the outcome of a strategic interaction and thus serve as a commitment device. We address this issue when contracts are renegotiable. More precisely, we analyze the equilibrium outcomes of twostage games with renegotiation-proof third-party contracts in relation to the equilibrium outcomes of the same game without contracts. We assume that one of the parties in the contractual relationship is unable to observe everything that happens in the game when played by the other party. This implies that contracts are incomplete and we show that such incompleteness restricts the set of equilibrium outcomes to a subset of Nash equilibrium outcomes of the game without contracts. Introducing renegotiation, in general, imposes further constraints and in some games implies that only subgame perfect equilibrium outcomes can be supported. However, there is a large class of games in which non-subgame perfect equilibriumoutcomes can also be supported, and hence, third-party contracts still have strategic implications even when they are renegotiable.Third-Party Contracts, Strategic Delegation, Incomplete Contracts, Renegotiation

Ambiguous Contracting: Natural Language and Judicial Interpretation

We study the relationship between ambiguity (which comes into the picture since contracts have to be written in natural language), and contractual incompleteness. The contracting process is modelled as a signalling game between the parties and the judge, with the contract as the signal. The judge is assumed to be bound by the content of the contract (in as far as it can be ascertained unambiguously). Two kind of examples are presented: The first set of examples shows how ambiguity can lead to incompleteness. Here incompleteness is a way of hedging against adverse judgements on the part of an imperfectly informed judge. The remaining example illustrates a sort of converse intuition: It shows how incompleteness might lead the contracting parties to write ambiguous contracts in order to afford a relatively well-informed judge freedom to enforce the parties'willincomplete contracts, natural language