Weight-Ranked Divide-and-Conquer Contracts

Abstract

This paper studies a large class of multi-agent contracting models with the property that agents' payoffs constitute a weighted potential game. Multiple equilibria arise due to agents' strategic interactions. I fully characterize a contracting scheme that is optimal for the principal for all equilibrium selection criteria that are more pessimistic than potential maximization. This scheme ranks agents in ascending order of their weights in the weighted potential game and then induces them to accept their offers in a dominance-solvable way, starting from the first agent. I apply the general results to networks, public goods/bads, and a class of binary-action applications.

Keywords: contracting with externalities, divide and conquer, potential games, networks, public goods

JEL Classification: C72, D85, D86, H41