Negotiation and take it or leave it in common agency

This paper contrasts models of common agency in which principals compete in incentive contracts (that is, they make take it or leave it offers) with models where principals offer agents menus of incentive contracts from which the final contract is negotiated. It is shown that pure strategy equilibria in incentive contracts are robust to the possibility that principals might offer menus. In addition, a no-externalities condition is given such that any equilibrium allocation with menus can be supported with competition in incentive contracts. The noexternalities condition is restrictive, but it is shown that it applies in most well known common agency problems, including, for example, the Bertrand pricing problem. Common agency provides a convenient way to model incentive problems in which there is competition. For example Bernheim and Whinston (1986a), Bernheim and Whinston (1986b) or Dixit, Grossman, and Helpman (1997) offer contracts to agents that make the transfer that the principal makes to the agent depend on the agent’s effort. Delegation problems can be analyzed similarly (for example Prat and Rustichini (1998),Prat and Rustichini