Bidding for incentive contracts

Authors

Benoit Julien, University of New South Wales
Guillaume Roger, University of WollongongFollow

RIS ID

128639

Publication Details

Julien, B. & Roger, G. (2018). Bidding for incentive contracts. Journal of Mathematical Economics, 79 95-105.

Abstract

Principals seek to enter into a productive relationship with agents by posting mechanisms in a market with competitive search. A mechanism includes an incentive contract if the meeting is bilateral, and an ex post bidding process, in which agents make contract offers, if several agents meet the same principal. In equilibrium, the bidding process induces a lottery over two contracts. The main result is that the equilibrium allocation is not constrained welfare optimal, precisely because of this contracting risk. This stands in contrast to known results. Hence the optimality of such ex post bidding mechanism is sensitive to the extensive form, as well as to risk aversion. Correcting the allocation is possible, but may be heavy-handed.