Optimal profit sharing mechanisms with type-dependent outside options

Wuqin Sun, Dazhong Wang and Yue Zhang

Journal of Mathematical Economics, 2018, vol. 75, issue C, 57-66

Abstract: This study considers a principal using a profit sharing mechanism to select one among multiple agents with type-dependent outside options to operate a project. Under mild conditions, we fully characterize revenue-maximizing profit sharing mechanisms. Moreover, we show that if the monotonicity of the virtual valuation holds, then optimal sharing mechanisms can be implemented by the first- and second-price share auctions with an optimally chosen reserve price. We further find that the principal’s expected revenue improves as outside options diminish and break-even shares become less responsive. When outside options are linear in types, full surplus extraction is obtained.

Keywords: Type-dependent outside options; Optimal profit sharing mechanisms; Share auctions (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:75:y:2018:i:c:p:57-66

DOI: 10.1016/j.jmateco.2017.12.007

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