Single versus Double Contract Regimes in Information Prospecting Model

 

Thitima Songsakul

Queen's University, Kingston, Canada

and

Concordia University, Montreal, Canada

 

In an information prospecting business, such as a sale of genetic information, a seller can demand a payment from buyers in terms of fixed price, a conditional payment based on a future earning of the project, or a mixture of the two payments. Our study focuses on the adverse selection model with two agents and two types. The principal has a choice whether to award the right to use a specific set of information to either one or two agents. The difference between types of the agents is in terms of cost and probability of discovering a commercial product (based on the use of the information provided under the contract agreed upon). The type of agent is private information. We find that the efficient second best contract for the good type is a fixed payment contract. The second best contract for the bad type can be a pure-conditional or a mixed payment contract. Our results also show that the double contract scheme generates more benefit to the seller than the single contract scheme when the difference between the types is sufficient large. However, if the two types are different only in cost, the single contract regime is superior because the seller needs not bear the opportunity cost of an additional firm.