Robust contracts in common agency

Authors

Keler Marku
Sergio Ocampo
Jean-Baptiste Tondji, The University of Texas Rio Grande ValleyFollow

Document Type

Article

Publication Date

6-2024

Abstract

Business activities often involve a common agent managing a variety of projects on behalf of investors with potentially conflicting interests. The extent of the agent's actions is also often unknown to investors, who have to design contracts that provide incentives to the manager despite this lack of crucial knowledge. We consider a game between several principals and a common agent, where principals know only a subset of the actions available to the agent. Principals demand robustness and evaluate contracts on a worst-case basis. This robust approach allows for a crisp characterization of the equilibrium contracts and payoffs and provides a novel proof of equilibrium existence in common agency by constructing a pseudo-potential for the game. Robust contracts make explicit how the efficiency of the equilibrium outcome relative to collusion among principals depends on the principals' ability to extract payments from the agent.

Comments

© 2024 The Authors. The RAND Journal of Economics published by Wiley Periodicals LLC on behalf of The RAND Corporation.

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.

Recommended Citation

Marku, K., Ocampo, S. and Tondji, J.B., 2024. Robust contracts in common agency. The RAND Journal of Economics, 55(2), pp.199-229. https://doi.org/10.1111/1756-2171.12463

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Publication Title

The RAND Journal of Economics

DOI

https://doi.org/10.1111/1756-2171.12463