Browsing by Subject "Separating Contracts"

Now showing 1 - 1 of 1
  • Thumbnail Image
    Item
    Optimal equilibrium contracts in the infinite horizon with no commitment across periods
    (Springer, 2023-04) Chakrabarti, Subir K.; Kim, Jaesoo; Economics, School of Liberal Arts
    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.