Optimal contracting in networks
Name
SSRN-id2774600.pdf
Description
Accepted version
Size
719.81 KB
Format
Adobe PDF
Checksum (MD5)
3abc6bd05507acdb4cad67312d1ad5b8
Author(s)
Jadbabaie, A
Kakhbod, A
Date Issued
September 1, 2019
Journal
Journal of Economic Theory
Publisher
Elsevier BV
Citation
Jadbabaie, A and Kakhbod, A. 2019. "Optimal contracting in networks." Journal of Economic Theory, 183.
Version
Author's final manuscript
Abstract
© 2019 Elsevier Inc. We study optimal contracting between a firm selling a divisible good that exhibits positive externality and a group of agents in a social network. The extent of externality that each agent receives from the consumption of neighboring agents is privately held and is unknown to the firm. By explicitly characterizing the optimal multilateral contract, we demonstrate how inefficiency in an agent's trade propagates through the network and creates unequal and network-dependent downward distortion in other agents' trades. Furthermore, we describe bilateral contracts (non-linear pricing schemes) and characterize their explicit dependence on the network structure. We show that the firm will benefit from uncertainty in an agent's valuation of other agents' externality. We describe the profit gap between multilateral and bilateral contracts and analyze the consequences of the explicit dependence of the contracts on network structure. When the network is balanced in terms of homogeneity of agents' influence, network structure has no impact on the firm's profit for bilateral contracts. On the other hand, when the influences are heterogeneous with high dispersion (as in core-periphery networks) the restriction to bilateral contracts can result in profit losses that grow unbounded with the size of networks.
MIT Department
Massachusetts Institute of Technology. Institute for Data, Systems, and Society
Massachusetts Institute of Technology. Department of Civil and Environmental Engineering
Terms of Use
Creative Commons Attribution-NonCommercial-NoDerivs License
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1016/j.jet.2019.07.017
