Costly verification of cost performance and the competition for incentive contracts
Article Abstract:
The optimal linear incentive contract to offer to prospective agents bidding for a principal's object, when the principal finds it costly to observe an agent's cost performance ex post but cannot commit to a monitoring policy ex ante, is determined. The principal's inability to verify an agent's cost report at no cost affects the optimal incentive contract. Cost sharing reduces the winning agent's informational rents but offers and incentive for the agent for cost padding ex post and to reduce his effort. The fewer the number of bidders and the larger the variance of their idiosyncratic cost, the higher the optimal cost-sharing parameter.
Publication Name: RAND Journal of Economics
Subject: Economics
ISSN: 0741-6261
Year: 1995
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Information sharing in oligopoly: the truth-telling problem
Article Abstract:
A truth-telling mechanism is necessary to ensure that firms will communicate accurate information to other firms in the market even without third-party verification. Information sharing can be beneficial, but a firm will send misleading information if it can. A Cournot game is presented to show that benefits from information sharing can exceed signalling costs, while sometimes signalling costs exceed benefits. Oligopolistic rivals can reduce signalling costs by exchanging transfer payments rather than wasting money by duplicating efforts.
Publication Name: RAND Journal of Economics
Subject: Economics
ISSN: 0741-6261
Year: 1993
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Option contracts and renegotiation: a solution to the hold-up problem
Article Abstract:
A study was conducted on the use of option contracts and renegotiation to solve the canonical hold-up model introduced by O.D. Hart and J. Moore in 1988. Option contracts provide sellers the right to deliver a fixed quantity of the good and make buyer contractual payments contingent on the delivery decision of the seller. It was noted that option contracts are feasible only when it is possible to enforce payments conditional on the delivery decision of the seller.
Publication Name: RAND Journal of Economics
Subject: Economics
ISSN: 0741-6261
Year: 1995
User Contributions:
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