Strategic Ex-ante Contracts: Rent-Extraction and Opportunity Costs

Xiny Hua ()

No 564, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: This paper considers the possibility that a seller can contract with one uninformed buyer prior to an auction involving two potential buyers. In a more general setting than previous literature, strategic ex-ante contracts not only extract rent from entrants, but could also mitigate the seller’s ex-post rent-seeking vis-à -vis the contracted buyer, thus reducing the probability of having no trade. The seller’s optimal ex-ante contract has strategic characteristics similar to the right of first refusal, a commonly used clause. Moreover, this optimal ex-ante contract specifies a lower trade barrier for the contracted buyer. Accordingly, it could create more social welfare than the absence of ex-ante contracts, depending on the contracted buyer’s ex-ante financial constraint and the distributions of trade surplus. This paper also shows how to implement the optimal strategic ex-ante contract by combining indirect clauses when the buyers’ valuations follow the uniform distribution. Finally, greater flexibility in policy choice and other commonly used strategic clauses are discussed

Keywords: Strateic ex-ante contracts; auctions; commitment; ex-post rent-seeking; opportunity costs (search for similar items in EconPapers)
JEL-codes: D82 L10 L40 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-mic
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Journal Article: Strategic ex ante contracts: rent extraction and opportunity costs (2007)
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