Optimal equilibrium contracts in the infinite horizon with no commitment across periods. (English) Zbl 1511.91073
Summary: The paper studies equilibrium contracts under adverse selection when there is repeated interaction between a principal and an agent over an infinite horizon, without commitment across periods. We show the second-best contract is offered in a perfect Bayesian equilibrium of the infinite horizon model. Unlike the equilibrium contracts in the finite-horizon, the equilibrium contracts in the infinite horizon are not subject to either the ratchet effect or take-the-money-and-run strategy, but rely on a carrot and stick strategy. We study two important applications, one of which is about the optimal regulation of a publicly-held firm. This application has a mixture of both moral hazard and adverse selection. The other application is to the problem of optimal nonlinear pricing when the valuation of the buyers are drawn from a continuum.
MSC:
| 91B41 | Contract theory (moral hazard, adverse selection) |
| 91A27 | Games with incomplete information, Bayesian games |
| 91B43 | Principal-agent models |
| 91A80 | Applications of game theory |
Keywords:
adverse selection; games with incomplete information; optimal contracts with commitment; pooling contracts; separating contracts; perfect Bayesian equilibrium; optimal contracts with no commitmentReferences:
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