Contracting with Endogenous Entry

Marco Pagnozzi and Salvatore Piccolo ()

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: A principal contracts with an agent who is privately informed about his production cost. Before contracting, the agent learns his probability of having a low cost – his ex ante “type” – and decides whether to pay an entry fee. We show that the entry game has two equilibria that determine the possible types of the agent who contract with the principal. Contrasting with standard intuition, in the equilibrium that is “risk dominant” for the agent, an increase in the entry fee increases the mass of types who enter and the expected cost of the entrant. Public policies that increase entry barriers may be welfare improving.

Keywords: Entry; Vertical Contracting; Asymmetric Information (search for similar items in EconPapers)
JEL-codes: D43 D82 L13 L51 (search for similar items in EconPapers)
Date: 2016-01-22, Revised 2016-04-23
New Economics Papers: this item is included in nep-com, nep-cta, nep-mic and nep-reg
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Published in International Journal of Industrial Organization, 2017, vol. 51, pp. 85-110

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http://www.csef.it/WP/wp426.pdf (application/pdf)

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Journal Article: Contracting with endogenous entry (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:426

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