The role of the agent's outside options in principal-agent relationships
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.
Year of publication: |
2010
|
---|---|
Authors: | Rasul, Imran ; Sonderegger, Silvia |
Published in: |
Games and Economic Behavior. - Elsevier, ISSN 0899-8256. - Vol. 68.2010, 2, p. 781-788
|
Publisher: |
Elsevier |
Keywords: | Adverse selection Randomization Type-dependent outside options |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
The role of the agent's outside options in principal-agent relationships
Rasul, Imran, (2008)
-
The role of the agent's outside options in principal-agent relationships
Rasul, Imran, (2010)
-
The Role of the Agent's Outside Options in Principal-Agent Relationships
Rasul, Imran, (2008)
- More ...