ECO.5:4 - Solution

ECO.5:4.1 - Locate the private fact or action

Name what matters to the exchange and who can know or control it. Existing quality, intended use or financial condition can be private information before agreement; maintenance, care or effort can be a later private action. Both can occur together, but changing the payment for an action does not automatically reveal an existing fact.

Describe the consequential alternatives available to each party: disclose, withhold, choose one offer, participate, change effort, manipulate a measure, withdraw or renegotiate. Use realistic available alternatives, not the assumption that every participant follows the author’s preferred plan.

ECO.5:4.2 - Change terms through the mechanism they create

Compare a small number of feasible constructions. A warranty can make low quality costly to its seller. A choice between service packages can reveal which combination a buyer values. Staged payment can limit exposure to nondelivery. A retained stake or performance payment can change the return to later action.

For each construction, ask separately: will the needed participant choose to enter, and, after entry, which choice becomes worthwhile? Where bounded probabilities and monetary consequences are justified, calculate them. Otherwise state the conditional comparisons and the assumption that would reverse them. Include the cost of verification, enforcement, capital tied up and unpriced consequences.

An observed result must contain useful information about the sought contribution. If the provider can improve the measured result by neglecting another important result, change the terms or the observation. If a signal mostly adds uncontrollable risk, using it can worsen participation without improving the action.

ECO.5:4.3 - Make the terms usable

Check that the proposed consequence can actually occur: the warranty provider can meet claims, an acceptance condition can be interpreted, a stake remains exposed, and the relevant parties can make the agreement. Obtain a bounded legal or specialist mechanism-design result when enforceability or a claimed guarantee depends on it. The economic comparison itself supplies neither.

Return the proposed terms, why they alter the important choice, and the unresolved condition. Reuse established terms when they already work. Do not collect additional information simply because it exists; compare the next attainable improvement with its burden.