Baik, Kyung Hwan and Kim, Jihyun (2014) Contests with Bilateral Delegation: Unobservable Contracts. Journal of Institutional and Theoretical Economics, 170 (3). pp. 387-405.

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Abstract

We study two-player contests in which, in order to win a prize, each player hires a delegate to expend effort on her behalf; neither party's delegation contract is revealed to the rival party when the delegates choose their effort levels. We obtain first the outcomes of this unobservable-contracts case. Next, we perform comparative statics of these outcomes with respect to the higher-valuation player's valuation for the prize. Finally, we compare the outcomes of the unobservable-contracts case with those of the observable-contracts case. We find, among other things, that the unobservability of delegation contracts narrows the gap between the delegates' equilibrium contingent compensation.