Econometrica: Jul 1985, Volume 53, Issue 4

Efficient and Durable Decision Rules: A Reformulation<817:EADDRA>2.0.CO;2-V
p. 817-836

Vincent P. Crawford

This paper studies the limits of contracting as a method for achieving efficient allocation, with particular attention to how informational asymmetries interact with the timing of commitment to a mechanism. There are arguments to suggest, in the spirit of the Coase "Theorem," that if agents can agree on a mechanism before observing their private information (or, a fortiori, if information is perfect or symmetric), they can realize an incentive-efficient allocation. If, however, agents observe their private information before contracting, there may be further restrictions, due to information leakage during the process of bargaining over mechanisms, on what they can achieve by contract. These restrictions are characterized and compared to those proposed for this setting by Holmstrom and Myerson [6]. It is also shown that there is at least one specification of the rules that govern mechanism design that makes it possible for agents to achieve, contracting after they observe their private information, the same incentive-efficient allocations that are attainable when they can commit themselves to a mechanism before observing their private information.

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