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Contracting for Multiple Goods under Asymmetric Information: The Two-goods Case

Kazumi Hori

No 888, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: This paper investigates how a buyer and a seller exchanging two goods should write the contract, where the seller makes sequences of unobservable relation-specific investments and the buyer privately learns valuations for goods which are stochastically influenced by the investments and these two types of asymmetric information cause inefficiency in trading. Three types of contract structures are possible. In a dynamic contract, the goods are traded sequentially and the order for the second good can be canceled to restore efficiency for the first good. In separate contracts, two goods are treated independently, whereas the two goods are bundled as a single good in bundled contracts. It will be shown that the dynamic contract is suboptimal and that the second-best contract is either a separate or a bundle contract, depending on the costs of investments.

Keywords: bilateral trading; cooperative investment; dynamic contract; hidden action; hidden information. (search for similar items in EconPapers)
JEL-codes: C72 D23 D82 D86 (search for similar items in EconPapers)
Pages: 20pages
Date: 2014-02
New Economics Papers: this item is included in nep-com, nep-cta, nep-gth and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:888

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