Optimal Leasing Durations: Options for Extension

Karsten Fieseler ()
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Karsten Fieseler: Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim

No 99-77, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: We analyse the revenue-maximising allocation of a single good of finite lifetime where the lifetime can be split up into a lease for an initial period and follow-up leases for the remaining time. The holder of the initial lease has private information about his willingness to pay. The informational rent is of the order of the duration of the lease contract. On the other hand, there is an incentive effect. The initial lease involves a start-up investment by its holder, constituting a positive externality for holders of follow-up leases. We model this trade off between informational rent and incentive effects and completely characterise optimal allocation mechanisms. We also introduce a simple mechanism, the extension option mechanism, which implements the optimal mechanism if leasing is only imperfectly divisible and a weak commitment restriction holds.

Pages: 31 pages
Date: 1999-06-26
Note: I am grateful to Martin Hellwig and Benny Moldovanu for their advice. I also wish to thank seminar participants at the University of Mannheim for helpful comments.
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