Sequential Common Agency

Tilburg University, CentER Discussion Paper Series No. 1998-95

Posted: 27 Sep 1999

See all articles by Andrea Prat

Andrea Prat

Centre for Economic Policy Research (CEPR); Columbia Business School - Finance and Economics

Aldo Rustichini

University of Minnesota - Twin Cities - Department of Economics

Date Written: 1998

Abstract

In a common agency game a set of principals promises monetary transfers to an agent whichdepend on the action he will take. The agent then chooses the action, and is paid the corresponding transfers. Principals announce their transfers simultaneously. This game has many equilibria; Bernheim and Whinston ([1]) prove that the action chosen in the coalition-proof equilibrium is efficient. The coalition-proof equilibria have an alternative characterization as truthful equilibria. The other equilibria may be inefficient. Here we study the sequential formulation of the common agency game: principals announce their transfers sequentially. We prove that the set of equilibria is different in many important ways. The outcome is efficient in all the equilibria. The truthful equilibria still exist, but are no longer coalition-proof. Focal equilibria are now a different type of equilibria, that we call thrifty. In thrifty equilibria of the sequential games, principals are better off (and the agent worse off) than in the truthful equilibria of the simultaneous common agency. These results suggest that the sequential game is more desirable institution, because it does not have inefficient equilibrium outcomes; but it is less likely to emerge when agents have the power to design the institution.

JEL Classification: C72, C78

Suggested Citation

Prat, Andrea and Rustichini, Aldo, Sequential Common Agency (1998). Tilburg University, CentER Discussion Paper Series No. 1998-95. Available at SSRN: https://ssrn.com/abstract=166485

Andrea Prat (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Aldo Rustichini

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

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