Contracting against a Non-contractible Outsider

Hongcheng Li

Papers from arXiv.org

Abstract: I study a general framework of contracting with externalities involving a non-contractible outsider. Strategic symmetry between the insider agent and the outsider is the source of multiple equilibria, even when their actions are strategic substitutes. To tackle strategic uncertainty, the principal guarantees a unique equilibrium outcome. A novel duality approach reformulates her problem as the choice of a series of agent expectations about outsider behavior, one for each agent action. The key constraint comes from eliminating undesired equilibria: she cannot convince the agent to expect higher incentives than those generated by the outsider's best responses to the actions she has already conquered. To reduce strategic rents, the principal optimally induces attenuated agent incentives. In supermodular or submodular environments, her coordination power and commitment power are substitutes in determining the contracting outcome, and perfect substitutes under further conditions. On contractual privacy, the principal can strictly prefer private contracting over public contracting, in sharp contrast to the benchmark that ignores robustness. Applications include regulating international competition, platform design, and labor union contracting.

Date: 2025-09, Revised 2026-10
New Economics Papers: this item is included in nep-cta, nep-inv and nep-mic
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