On the Optimality of Privacy in Sequential Contracting

JOURNAL OF ECONOMIC THEORY, Vol. 130, No. 1, pp. 168-204, September 2006

36 Pages Posted: 11 May 2004 Last revised: 3 Jun 2010

See all articles by Giacomo Calzolari

Giacomo Calzolari

European University Institute - Economics Department (ECO); Centre for Economic Policy Research (CEPR); University of Bologna

Alessandro Pavan

Northwestern University

Date Written: September 1, 2006

Abstract

This paper studies the exchange of information between two principals who contract sequentially with the same agent, as in the case of a buyer who purchases from multiple sellers. We show that when (a) the upstream principal is not personally interested in the downstream level of trade, (b) the agent's valuations are positively correlated, and (c) preferences in the downstream relationship are separable, then it is optimal for the upstream principal to offer the agent full privacy. On the contrary, when any of these conditions is violated, there exist preferences for which disclosure is strictly optimal, even if the downstream principal does not pay for the information. We also examine the effects of disclosure on welfare and show that it does not necessarily reduce the agent's surplus in the two relationships and in some cases may even yield a Pareto improvement.

Keywords: Contractual and informational externalities, mechanism design, optimal disclosure policy, sequential common agency, exogenous and endogenous private information

JEL Classification: D82, C73, L1

Suggested Citation

Calzolari, Giacomo and Pavan, Alessandro, On the Optimality of Privacy in Sequential Contracting (September 1, 2006). JOURNAL OF ECONOMIC THEORY, Vol. 130, No. 1, pp. 168-204, September 2006 , Available at SSRN: https://ssrn.com/abstract=544762

Giacomo Calzolari

European University Institute - Economics Department (ECO) ( email )

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Alessandro Pavan (Contact Author)

Northwestern University ( email )

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