| This dissertation contains two essays on how contracting affects behavior and welfare of firms when information about some key variables is imperfect. The first essay deals with contractual solutions to the holdup problem when a party's relationship-specific investment can be subsidized by the other party. The second essay considers relational contracts and pricing patterns in a Bertrand game in which each firm has private information about the demand state.; Holdup with subsidized investment. In this essay a holdup model is analyzed in which one party, the seller, has an investment project that the other party, the buyer, can subsidize: The investment project remains the seller's; she cannot transfer her entire control rights to it. In particular, she can always refuse to allow the buyer to subsidize her investment if the subsidy would put the buyer in too strong a bargaining position ex post. Even with the subsidization opportunity, the holdup inefficiency is still present, except in the special cases in which one party has all the bargaining power. The adoption of a contract, however, allows full efficiency to be achieved more generally. In particular, if the seller's investment project imposes a positive externality on the buyer but does not reduce her own production costs, a buyer's option contract exists that achieves full efficiency. This is in contrast to the result of Che and Hausch (1999) that without a subsidization opportunity, contracting has no value in this "purely cooperative" case. If the investment lowers the seller's costs as well as raises the buyer's value, whether full efficiency can be achieved depends on how cooperative the investment is. Full efficiency can be achieved if the cooperativeness of the investment is either sufficiently high or sufficiently low.; Collusion, fluctuating demand, and price rigidity (with Huanxing Yang). In this essay we study an infinitely repeated Bertrand game in which an i.i.d. demand shock occurs in each period. Each firm receives a private signal about the demand shock at the beginning of each period. At the end of each period, information about the underlying demand shock and the rivals' prices becomes public. A firm's pricing schedule can be either a sorting scheme, in which its price depends on its private signal, or a price-rigidity scheme in which the firm charges the same price regardless of its private signal. We consider the optimal strong symmetric perfect public equilibrium (SPPE). The optimal SPPE consists of a profile of price-rigidity schemes if the accuracy of the private signals is low. Moreover, the lower the variance of the demand shock, the more likely that a price-rigidity scheme is optimal. These results contribute to our understanding of which industries, and under what conditions, should exhibit rigid prices. |
