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American Economic Journal: Microeconomics: Vol. 4 No. 2 (May 2012)

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Contracting with Heterogeneous Externalities

Article Citation

Bernstein, Shai, and Eyal Winter. 2012. "Contracting with Heterogeneous Externalities." American Economic Journal: Microeconomics, 4(2): 50-76.

DOI: 10.1257/mic.4.2.50

Abstract

We model situations in which a principal offers contracts to a group of agents to participate in a project. Agents' benefits from participation depend on the identity of other participating agents. We assume heterogeneous externalities and characterize the optimal contracting scheme. We show that the optimal contracts' payoff relies on a ranking, which arise from a tournament among the agents. The optimal ranking cannot be achieved by a simple measure of popularity. Using the structure of the optimal contracts, we derive results on the principal's revenue extraction and the role of the level of externalities' asymmetry. (JEL D62, D82, D86)

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Authors

Bernstein, Shai (Harvard U)
Winter, Eyal (Center for the Study of Rationality, Hebrew U Jerusalem)

JEL Classifications

D62: Externalities
D82: Asymmetric and Private Information
D86: Economics of Contract: Theory

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