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Contracting with Heterogeneous Externalities

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  • Shai Bernstein
  • Eyal Winter

Abstract

We model situations in which a principal offers contracts to a group of agents to participate in a project. Agents' benefits from participation depend on the identity of other participating agents. We assume heterogeneous externalities and characterize the optimal contracting scheme. We show that the optimal contracts' payoff relies on a ranking, which arise from a tournament among the agents. The optimal ranking cannot be achieved by a simple measure of popularity. Using the structure of the optimal contracts, we derive results on the principal's revenue extraction and the role of the level of externalities' asymmetry. (JEL D62, D82, D86)

Suggested Citation

  • Shai Bernstein & Eyal Winter, 2012. "Contracting with Heterogeneous Externalities," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 50-76, May.
    • Handle: RePEc:aea:aejmic:v:4:y:2012:i:2:p:50-76
    Note: DOI: 10.1257/mic.4.2.50
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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