Contracting with heterogeneous externalities

Shai Bernstein*, Eyal Winter

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

21 Scopus citations

Abstract

We model situations in which a principal offers contracts to a group of agents to participate in a project. Agents' benefits from participation depend on the identity of other participating agents. We assume heterogeneous externalities and characterize the optimal contracting scheme. We show that the optimal contracts' payoff relies on a ranking, which arise from a tournament among the agents. The optimal ranking cannot be achieved by a simple measure of popularity. Using the structure of the optimal contracts, we derive results on the principal's revenue extraction and the role of the level of externalities' asymmetry. (JEL D62, D82, D86).

Original languageAmerican English
Pages (from-to)50-76
Number of pages27
JournalAmerican Economic Journal: Microeconomics
Volume4
Issue number2
DOIs
StatePublished - May 2012

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