Bidding for incentive contracts

Benoit Julien and Guillaume Roger

Journal of Mathematical Economics, 2018, vol. 79, issue C, 95-105

Abstract: Principals seek to enter into a productive relationship with agents by posting mechanisms in a market with competitive search. A mechanism includes an incentive contract if the meeting is bilateral, and an ex post bidding process, in which agents make contract offers, if several agents meet the same principal. In equilibrium, the bidding process induces a lottery over two contracts. The main result is that the equilibrium allocation is not constrained welfare optimal, precisely because of this contracting risk. This stands in contrast to known results. Hence the optimality of such ex post bidding mechanism is sensitive to the extensive form, as well as to risk aversion. Correcting the allocation is possible, but may be heavy-handed.

Keywords: Moral hazard; Asymmetric information; Contracts; Bidding; Directed search; Constrained efficiency (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:79:y:2018:i:c:p:95-105

DOI: 10.1016/j.jmateco.2018.05.001

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