Multilateral Contracting with Manipulation
In: The economic journal: the journal of the Royal Economic Society, Band 131, Heft 639, S. 2693-2725
ISSN: 1468-0297
Abstract
We study multi-lateral risk sharing when the state of nature is unverifiable, so that contracts are conditioned on a state-dependent signal (e.g., net earnings in a financial report). A subset of the agents can manipulate the signal's realisation at some cost and, as a result, Pareto-optimal reallocation of risk is precluded. The agents can write additional side contracts that can be used to incentivise one of the parties to manipulate the signal. Using a novel stability notion that takes into account agents' beliefs about contemporaneous deviations initiated by their counterparties, we explore the limits of risk sharing and risk bearing.