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Author Pavan, Alessandro
Source CiteSeerX
Content type Text
File Format PDF
Subject Domain (in DDC) Computer science, information & general works ♦ Data processing & computer science
Subject Keyword Long-term Contracting ♦ Changing World ♦ Satis Ed ♦ Optimal Mechanism ♦ Buyer Payo ♦ Optimal Quantity ♦ Adjacent Period ♦ Many Contractual Situation ♦ Optimal Long-term Contract ♦ Certain Overlapping Condition ♦ Multiplicative Ect ♦ Possible Type ♦ Buyer Valuation ♦ Binary State Space ♦ Agent Type ♦ Markov Process ♦ Simple Discrete Example ♦ Nancial Application ♦ Buyer-seller Relationship ♦ Brownian Motion ♦ Optimal Income-taxation ♦ Simpli Ed ♦ Buyer Private Information ♦ Additional Regularity Condition
Abstract I study the properties of optimal long-term contracts in an environment in which the agent’s type evolves stochastically over time. The model stylizes a buyer-seller relationship but the results apply quite naturally to many contractual situations including regulation and optimal income-taxation. I …rst show, through a simple discrete example, that distortions need not vanish over time and need not be monotonic in the shock to the buyer’s valuation. These results are in contrast to those obtained in the literature that assumes a Markov process with a binary state space — e.g. Battaglini, 2005. I then show that the study of the dynamics of the optimal mechanism can be signi…cantly simpli…ed by assuming the shocks are independent over time. When the sets of possible types in any two adjacent periods satisfy a certain overlapping condition (which is always satis…ed with a continuum of types) and some additional regularity conditions hold, then the optimal mechanism is the same irrespective of whether the shocks are the buyer’s private information or are observed also by the seller. These conditions are satis…ed, for example, in the case of an AR(1) process, a Brownian motion, but also when shocks have a multiplicative e¤ect as it is often the case in …nancial applications. Furthermore, the distortions in the optimal quantities are independent of the distributions of the shocks and, when the buyer’s payo ¤ is additively separable, they are also independent of whether the shocks are transitory or permanent. Finally, I show that assuming the shocks are independent not only does it greatly simplify the analysis, it is actually without loss of generality.
Educational Role Student ♦ Teacher
Age Range above 22 year
Educational Use Research
Education Level UG and PG ♦ Career/Technical Study
Publisher Date 2007-01-01