Commitment via Third-Party Contracts in Bilateral Trade: A Three-Way Equivalence
with Daniele Condorelli and Tanay Kasyap Last Updated: January 23, 2025
Paper Abstract
A buyer with private value makes a take-it-or-leave-it offer to a seller with private cost. Which trading outcomes are implementable if the seller can sign observable and binding contracts ex ante with a third party that specify transfers as a function of the price posted and whether trade occurs? We establish a three-way equivalence: contract-implementable outcomes coincide with those achievable if the seller commits ex ante to an observable cost-dependent price-acceptance strategy, which are outcomes implementable with direct bilateral trading mechanisms subject to ex post monotonicity of the allocation in the seller's cost, and buyer’s interim incentive and participation constraints. We show royalty schemes can implement ex post efficiency, but also turn buyer monopsony into seller monopoly. 