Postponed Implementation

Abstract

The paper studies the incentives of a principal to postpone implementation of her contract when she anticipates that the agent will contract with other parties in the future. We consider a sequential common agency game between two principals and a single agent under private information about his preferences. The contract of the first principal exerts a pure information externality on the contract of the second one. When the first contract is immediately enforced, the first principal has to compensate the agent for the loss of information advantage due to observability of the outcome of the contract by the other principal. We characterize optimal contracts under immediate and postponed implementation. By postponing the implementation of her contract, the first principal avoids the information leakage induced by her contract which makes the information acquisition less costly. We introduce the possibility of renegotiation of the first contract, and show that the first principal can reduce the uncertainty at the renegotiation stage by committing to status quo contract favorable to the agent.

Keywords: sequential contracting, information externality, immediate and postponed implementation

JEL Classification: D82, C73, L14