Contracts with Informational Externalities

32 Pages Posted: 30 Mar 2010

See all articles by Mikhail Drugov

Mikhail Drugov

Centre for Economic Policy Research (CEPR); New Economic School (NES)

Date Written: March 17, 2010

Abstract

This paper studies informational externalities between contracts. Two principals (for instance the governments of two neighbouring countries) deal with two different agents (for instance a railway company in each country). If, in the first period, an agent refuses the contract offered by his principal, the principal can offer a new contract in the second period. If pair A has not signed a first period contract but pair B has, information about the contract signed by pair B (and also, maybe, some exogenous information) is transmitted to pair A in between the two periods. As a consequence, because the types of the agents are correlated, there are informational externalities between the two principal-agent pairs. Inefficient equilibria with delay, i.e., with agreement in the second period, are obtained. In any equilibrium with delay only the low cost agent produces in the first period. I also show that there is always some production in the first period. More results under specific assumptions on the information structure of the game are provided. In particular, I identify some cases when the delays in the two pairs are strategic substitutes/complements.

Keywords: Information, externalities, adverse selection, delay, bargaining

JEL Classification: D82, D83, L51

Suggested Citation

Drugov, Mikhail, Contracts with Informational Externalities (March 17, 2010). Available at SSRN: https://ssrn.com/abstract=1573480 or http://dx.doi.org/10.2139/ssrn.1573480

Mikhail Drugov (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

New Economic School (NES) ( email )

100A Novaya Street
Moscow, Skolkovo 143026
Russia

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