Rasul, I.; Sonderegger, S.; (2010) The role of the agent's outside options in principal-agent relationships. (ELSE Working Papers 354). ESRC Centre for Economic Learning and Social Evolution: London, UK.

Preview

PDF 19451.pdf Download (220kB)

Abstract

We consider a principal-agent model of adverse selection where, in order to trade with the principal, the agent must undertake a relationship-specific investment which affects his outside option to trade, i.e. the payoff that he can obtain by trading with an alternative principal. This creates a distinction between the agent’s ex ante (before investment) and ex post (after investment) outside options to trade. We investigate the consequences of this distinction, and show that whenever an agent’s ex ante and ex post outside options differ, this may equip the principal with an additional tool for screening among different agent types, by randomizing over the probability with which trade occurs once the agent has undertaken the investment. In turn, this may enhance the efficiency of the optimal second-best contract.

Download activity - last month

Export as XMLCSVJSON

Download activity - last 12 months

Export as XMLCSVJSON

Downloads by country - last 12 months

Export as CSVXMLJSON

Archive Staff Only

View Item