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Essays on Contract Theory and Industrial Organization

  • Author(s): Lu, Zhuoran
  • Advisor(s): Board, Simon Adrian
  • Meyer-ter-Vehn, Moritz
  • et al.
Abstract

This dissertation consists of three essays on contract theory and industrial organization.

The first chapter studies a signaling model in which a strategic player determines the cost structure of signaling. A principal chooses a price schedule for a product, and an agent with a hidden type chooses how much to purchase as a signal to the market. When the market observes the price schedule, the principal charges monopoly prices, and the agent purchases less than the first-best. In contrast, when the market does not observe the price schedule, the principal charges lower prices, and the agent purchases more than in the observed case; those of the highest types purchase more than the first-best. In terms of payoffs, the principal gains lower profits, whereas the agent obtains higher utility than in the observed case. When the intensity of signaling activity is sufficiently high, the observed case yields higher social welfare than the unobserved case. The model can be applied to schools choosing tuition, retailers selling luxury goods and media companies selling advertising messages.

The second chapter studies nonlinear pricing for horizontally differentiated products that provide signaling values to consumers with private information, who choose how much to purchase as a signal to the receivers. I characterize the optimal symmetric price schedules under different market structures. Under monopoly, when the receivers observe the price schedule, the market is partially covered, and quantity is downward distorted if there is little horizontal differentiation. As the degree of horizontal differentiation rises, the market coverage rises, and the downward distortion decreases. When the degree is sufficiently high, for a certain level of signaling intensity, the monopolistic allocation achieves the first-best; for higher signaling intensities, quantity is upward distorted at the low end. In contrast, when the receivers do not observe the price schedule, the market is always partially covered, and the allocation is more dispersed than that in the observed case. Specifically, higher types purchase more than in the observed case, with the highest types purchasing more than the first-best, whereas lower types purchase less than in the observed case, with more types excluded from the market. When the market structure changes from monopoly to duopoly, market competition results in a higher market coverage and larger quantities for both the observed and unobserved case.

The third chapter analyzes a principal-agent model to study how the architecture of peer monitoring affects the optimal sequence for teamwork. The agents work on a joint project, each responsible for an individual task. The principal determines the sequence of executing tasks as well as the rewards upon success of the project, the probability of which depends on each agent's effort and ability, with the objective of inducing full effort with minimum rewards. Agents may observe one another's effort based on an exogenous network and the endogenous sequence. We focus on networks composed of stars, and find a simple algorithm to characterize the optimal sequence of task assignment. The optimal sequence reflects the trade-off between the magnitude and the coverage of reward reduction in incentive design. In a single star, less capable periphery agents precede their center while more capable ones succeed their center. In complex networks consisting of multiple stars, periphery agents precede their center early in the sequence but succeed their center late in the sequence. When the number of peripheries differ across stars, a "V-shape" emerges: agents in large stars are allocated towards both ends of the sequence, while those in small ones towards the middle.

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