Menu theorems for bilateral contracting

This paper studies the bilateral contracting environment where multiple principals negotiate contracts with multiple agents independently. It is shown that equilibrium allocations associated with (pure strategy) perfect Bayesian equilibria relative to any ad hoc set of negotiation schemes can be supported by pure strategy perfect Bayesian equilibria relative to the set of menus. It is also shown that equilibrium allocations associated with all perfect Bayesian equilibria relative to any ad hoc set of negotiation schemes can be supported by correlated equilibria relative to the set of menus, where the set of states is simply the set of feasible probability distributions over payoffrelevant variables. Moreover, equilibrium allocations associated with all equilibria relative to the set of menus persist even if principals use more complex negotiation schemes. JEL classification numbers: D82, C79 ∗Department of Economics, Kenneth Talyor Hall, Room 426, McMaster University 1280 Main Street West, Hamilton, Ontario, Canada, L8S 4M4. Email:[email protected]. This is a revised version of the first chapter in my PhD dissertation at the University of Toronto. I am deeply indebted to Michael Peters for his insightful guidance and advice. I wish to thank Ettore Damiano, Jeffrey Ely, Martin Osborne, Alessandro Pavan, Carolyn Pitchik, Ilya Segal and seminar participants at the University of Toronto and the 2002 Canadian Economic Theory Conference for numerous helpful comments and discussions. Financial support from Social Sciences and Humanities Research Council of Canada is thankfully acknowledged. All errors are mine alone.