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Title:On the optimality of privacy in sequential contracting PDF Logo
Authors:Calzolari, Giacomo
Pavan, Alessandro
Issue Date:2004
Series/Report no.:Discussion paper // Center for Mathematical Studies in Economics and Management Science 1394
Abstract:This paper considers an environment where two principals sequentially contract with a common agent and studies the exchange of information between the two bilateral relationships. We show that when (a) the upstream principal is not personally interested in the decisions taken by the downstream principal, (b) the agent’s exogenous private information has a vertical structure in the sense that the sign of the single crossing condition is the same for upstream and downstream decisions, and (c) preferences in the downstream relationship are separable, then the upstream principal optimally commits to full privacy, whatever price the downstream principal is willing to pay to receive information. On the contrary, when any of the above conditions is violated, the upstream principal may find it strictly optimal to disclose a (noisy) signal of the agent’s xogenous type and/or the result of his upstream contractual activity, even if she can not make the downstream principal pay for the information she receives. We also show that disclosure does not necessarily reduce the equilibrium payoff of the agent and may lead to a Pareto improvement for the three players.
Subjects:contractual and informational externalities
mechanism design, optimal disclosure policy
sequential common agency
exogenous and endogenous private information
JEL:D82
C73
L1
Document Type:Working Paper
Appears in Collections:Discussion Papers, Kellogg School of Management, Northwestern University

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