Public Contracting in Delegated Agency Games
48 Pages Posted: 15 Feb 2014
Date Written: January 16, 2013
We study games of public delegated common agency under asymmetric information. Using tools from non-smooth analysis and optimal control, we derive best responses and characterize equilibria (both continuous and discontinuous) using self-generating optimization programs of which any equilibrium allocation must be a solution. Special attention is given to common agency games in which each principal's payoff is a linear function of the agent's action. In such games the self-generating optimization program reduces to the maximization of the principals' "aggregate" virtual surplus in which the agent's marginal valuation is replaced by a confluence of "virtual" valuations that reflect common agency problems.
In all equilibria, we illustrate that there are two distinct sources of inefficiencies: inefficient contracting by a given coalition of active principals and inefficient activity by principals. One noteworthy subset of equilibrium allocations are maximal in the range of actions that arise. These allocations are straightforward to compute and are supported by continuously differentiable transfer functions. Furthermore, starting from a maximal allocation, it is possible to introduce discontinuities that are supported in a corresponding non-smooth, discontinuous equilibrium that has a smaller range of allocations (i.e., not maximal).
Our results are illustrated by means of two games: a public goods game in which each player simultaneously offers a menu contract to a common provider of the public good in order to induce greater supply, and a lobbying game between conflicting interest groups in which each group offers a menu of contributions to a common political decision-maker in an attempt to influence policymaking.
Keywords: common agency, asymmetric information, menu auctions, delegated contracting games, public goods, lobbying
JEL Classification: C70, D82
Suggested Citation: Suggested Citation