Bidding for incentive contracts

Benoît Julien, Guillaume Roger

Research output: Contribution to journalArticleResearchpeer-review

Abstract

Principals seek to enter into a productive relationship with agents by posting mechanisms in a market with competitive search. A mechanism includes an incentive contract if the meeting is bilateral, and an ex post bidding process, in which agents make contract offers, if several agents meet the same principal. In equilibrium, the bidding process induces a lottery over two contracts. The main result is that the equilibrium allocation is not constrained welfare optimal, precisely because of this contracting risk. This stands in contrast to known results. Hence the optimality of such ex post bidding mechanism is sensitive to the extensive form, as well as to risk aversion. Correcting the allocation is possible, but may be heavy-handed.

Original languageEnglish
Pages (from-to)95-105
Number of pages11
JournalJournal of Mathematical Economics
Volume79
DOIs
Publication statusPublished - Dec 2018
Externally publishedYes

Keywords

  • Asymmetric information
  • Bidding
  • Constrained efficiency
  • Contracts
  • Directed search
  • Moral hazard

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