Contracts and Mechanisms

Paper Session

Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM

Hyatt Regency Chicago, Field
Hosted By: Econometric Society
  • Chair: Bard Harstad, University of Oslo

Conservation Contracts for Exhaustible Resources

Bard Harstad
University of Oslo
Nils Christian Framstad
University of Oslo


This paper studies how to best incentivize owners to conserve rather than deplete exhaustible resources. This is an important issue when it comes to forest conservation agreements, but it may also become important for other environmental problems, such as climate change. We present a dynamic model where each resource owner benefits from extracting and selling the resource over time. A third party, or principal, is harmed by the extracted amount or she benefits from conservation. The principal can set up payment schedules that incentivize the owners to conserve. We show that the best contract induces the smallest resource stocks to be depleted first, while the largest stock will be extracted from later. To little is conserved permanently and the speed of extraction is too high. These three results are reversed if and only if it is very costly to protect the resource. By comparison, the first best would require that more is conserved, and that extraction begins where the extraction cost is lowest. The difference to the first best is magnified if some buyers boycott the products.

Selling With Evidence

Vasiliki Skreta
University College London


\citet{ake70} argues that the superior information often held by sellers leads to market failure, since high quality sellers are unwilling to sell at the prevailing market price. If sellers can certify their quality, information unravels because high quality sellers have the biggest incentive to certify in order to receive a high price. We consider a privately informed seller who can propose any selling mechanism to a buyer. Values are interdependent, so the seller's reservation value or cost and the buyer's valuation can depend both on the buyer's taste and on product characteristics. Product information is voluntarily and costlessly certifiable by the seller. While the seller's certification ability enlarges the set of feasible selling procedures because it relaxes his incentive constraints, it also makes deviations more compelling as a high-type seller can deviate and provide evidence of his quality.<br />
We characterise all feasible allocations under any certifiability structure, formulate the informed-principal mechanism-proposal game and describe a canonical certification and communication protocol. We show that there is always an ex-ante profit-maximizing selling procedure that is an equilibrium of the (interim) mechanism-proposal game. In general, posted prices are sub-optimal and in contrast to the case where the seller can only post prices, his ability to certify increases profits compared to the case where his product information is public, both from the ex-ante and the interim perspectives. The unravelling outcome may not be an equilibrium even when all buyer types agree on the ranking of product quality. Under further assumptions analogous to ones in \citet{mas_tir90}, we show that \emph{all} equilibrium outcomes are ex-ante profit-maximising.

Relational contracting with external enforcement

David Aaron Miller
University of Michigan


Authors: David A. Miller, Trond Olsen, and Joel Watson

We study relational contracting in environments with incomplete external enforcement of long-term contracts. The external part of a long term contract governs the game the contracting parties will play in the future if they fail to renegotiate. In a contractual equilibrium, they jointly optimize, while recognizing their relative bargaining power and anticipating their future renegotiations. Our main result is that if the external enforcer can compel transfers, then in a contractual equilibrium the parties always renegotiate to a unique semi-stationary contract, which specifies the same externally-enforced terms in every future period, but special externally-enforced terms for the current period. In a simple principal-agent model with a choice of costly monitoring technology, the optimal semi-stationary contract specifies mild monitoring for the current period, but intense monitoring for future periods. Because the parties renegotiate in each new period, intense monitoring arises only off the equilibrium path after a failed renegotiation.
JEL Classifications
  • C0 - General