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Dominant Strategy Mechanisms for Contract Auctions with Risk Aversion and Moral Hazard

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  • Page, Frank H, Jr

Abstract

Within the class dominant strategy incentive compatible mechanisms, we show that there exists an optimal contracting mechanism for the principal for a version of the incomplete information principal-agent problem in which several agents compete for a contract and the principal selects an agent via a contract auction. In our auction model, we assume that the principal and the agents are risk averse, and we allow for uncountably many agent types. We also assume that the principal's probability measure over type profiles in such that correlation between agent's types is possible. Thus, we do not require that agents' types be independently distributed. Finally, we impose limited liability constraints upon the set of contracts. Due to the nature of the individual rationality and incentive compatibility constraints, the existence problem is nonstandard and novel existence arguments are required. We prove existence using a measurable selection result and a new notion of compactness called K-compactness.

Suggested Citation

  • Page, Frank H, Jr, 1994. "Dominant Strategy Mechanisms for Contract Auctions with Risk Aversion and Moral Hazard," International Journal of Game Theory, Springer;Game Theory Society, vol. 23(1), pages 25-42.
    • Handle: RePEc:spr:jogath:v:23:y:1994:i:1:p:25-42
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    Cited by:

    1. Adiel Almeida, 2005. "Multicriteria Modelling of Repair Contract Based on Utility and ELECTRE I Method with Dependability and Service Quality Criteria," Annals of Operations Research, Springer, vol. 138(1), pages 113-126, September.
    2. Page Jr., Frank H., 1998. "Existence of optimal auctions in general environments," Journal of Mathematical Economics, Elsevier, vol. 29(4), pages 389-418, May.
    3. Teixeira de Almeida, Adiel, 2001. "Multicriteria decision making on maintenance: Spares and contracts planning," European Journal of Operational Research, Elsevier, vol. 129(2), pages 235-241, March.

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