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Optimal multilateral contracts

In: Differential Information Economies

Author

Listed:
  • Stefan Krasa

    (University of Illinois)

  • Anne P. Villamil

    (University of Illinois)

Abstract

Summary The purpose of this paper is to derive the structure of optimal multilateral contracts in a costly state verification model with multiple agents who may be risk averse and need not be identical. We consider two different verification technology specifications. When the verification technology is deterministic, we show that the optimal contract is a multilateral debt contract in the sense that the monitoring set is a lower interval. When the verification technology is stochastic, we show that transfers and monitoring probabilities are decreasing functions of wealth. The key economic problem in this environment is that optimal contracts are interdependent. We are able to resolve this interdependency problem by using abstract measure theoretic tools.

Suggested Citation

  • Stefan Krasa & Anne P. Villamil, 2005. "Optimal multilateral contracts," Studies in Economic Theory, in: Dionysius Glycopantis & Nicholas C. Yannelis (ed.), Differential Information Economies, pages 319-340, Springer.
    • Handle: RePEc:spr:steccp:978-3-540-26979-3_17
    DOI: 10.1007/3-540-26979-7_17
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    Cited by:

    1. Caffera, Marcelo & Dubra, Juan & Figueroa, Nicolás, 2018. "Mechanism design when players’ preferences and information coincide," Mathematical Social Sciences, Elsevier, vol. 91(C), pages 56-61.
    2. João Correia-da-Silva, 2015. "Two-period economies with price-contingent deliveries," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 59(3), pages 509-525, August.
    3. Elizabeth Asiedu & Yi Jin & Anne Villamil, 2006. "Do lack of transparency and enforcement undermine international risk-sharing?," Annals of Finance, Springer, vol. 2(2), pages 123-140, March.
    4. Anne Villamil & Stefan Krasa & Tridib Sharma, 2004. "Enforcement and Firm Finance," 2004 Meeting Papers 868, Society for Economic Dynamics.
    5. Anna Maria Menichini & Peter Simmons, 2014. "Sorting the good guys from bad: on the optimal audit structure with ex-ante information acquisition," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(2), pages 339-376, October.
    6. Waly Wane, 2002. "Income Taxation and Tax Evasion in a Finite Economy," Annals of Economics and Finance, Society for AEF, vol. 3(2), pages 407-431, November.
    7. Zhixiong Zeng, 2013. "A theory of the non-neutrality of money with banking frictions and bank recapitalization," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(2), pages 729-754, March.
    8. Diemo Dietrich & Achim Hauck, 2020. "Interbank borrowing and lending between financially constrained banks," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(2), pages 347-385, September.
    9. Marco Bassetto & Christopher Phelan, 2008. "Tax Riots," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 649-669.
    10. Diogo Baerlocher, 2022. "Public employment and economic growth," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(1), pages 211-236, February.
    11. Antinolfi, Gaetano & Kawamura, Enrique, 2008. "Banks and markets in a monetary economy," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 321-334, March.
    12. Miles Gietzmann & Adam Ostaszewski, 2014. "Multi-firm voluntary disclosures for correlated operations," Annals of Finance, Springer, vol. 10(1), pages 1-45, February.
    13. Angelo Baglioni & Luca Colombo, 2009. "Managers’ Compensation And Misreporting: A Costly State Verification Approach," Economic Inquiry, Western Economic Association International, vol. 47(2), pages 278-289, April.
    14. Hans Hvide & Tore Leite, 2010. "Optimal debt contracts under costly enforcement," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 44(1), pages 149-165, July.
    15. Tan, Liang, 2013. "Creditor control rights, state of nature verification, and financial reporting conservatism," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 1-22.
    16. Bénédicte Coestier & Nathalie Fombaron, 2003. "L'audit en assurance," THEMA Working Papers 2003-41, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    17. Josef Schosser & Jochen Wilhelm, 2018. "Costly state verification and truthtelling: a note on the theory of debt contracts," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(2), pages 129-139, October.
    18. Villamil, Anne P., 2003. "Introduction to capital accumulation and allocation in economic growth," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(4), pages 583-591.
    19. M. Martin Boyer, 2004. "On the Use of Hierarchies to Complete Contracts when Players Have Limited Abilities," CIRANO Working Papers 2004s-41, CIRANO.
    20. Andrew Winton, 1996. "Monitored finance, liquidity, and institutional investment choice," Working Papers (Old Series) 9616, Federal Reserve Bank of Cleveland.
    21. Podczeck, Konrad & Yannelis, Nicholas C., 2008. "Equilibrium theory with asymmetric information and with infinitely many commodities," Journal of Economic Theory, Elsevier, vol. 141(1), pages 152-183, July.
    22. Stanley D. Longhofer, 1994. "Bankruptcy rules and debt contracting: on the relative efficiency of absolute priority, proportionate priority, and first-come, first-served rules," Working Papers (Old Series) 9415, Federal Reserve Bank of Cleveland.

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