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Bilateral Trade and Opportunism in a Matching Market

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Author Info
Garey Ramey (UC San Diego)
Joel Watson (UC San Diego)

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Abstract

We develop a model of bilateral contracting in a dynamic market setting. Asset owners must be paired via a matching process in order to form productive relationships involving long-term investments and ongoing effort. Market frictions shape the owners' incentives to invest in the absence of complete contracts. We identify cases in which there exists an optimal positive level of market friction implementing first-best investment levels. We also endogenize the choice between integrated and nonintegrated organizational forms. Changes in structural variables can induce crashes by disrupting existing relationships.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Contributions to Theoretical Economics.

Volume (Year): 1 (2001)
Issue (Month): contributions/1/1 ()
Pages: 1030-1030
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Handle: RePEc:bep:thecon:v:1:y:2001:i:contributions/1/1:p:1030-1030

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Related research
Keywords: contracting specific investment matching friction self-enforcement

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Wouter J. den Haan & Garey Ramey & Joel Watson, 1999. "Liquidity Flows and Fragility of Business Enterprises," University of California at San Diego, Economics Working Paper Series 99-07, Department of Economics, UC San Diego. [Downloadable!]
    Other versions:
  2. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 57(2), pages 279-98, April. [Downloadable!] (restricted)
  3. Ricardo J. Caballero & Mohamad L. Hammour, 1995. "On the Ills of Adjustment," Working papers 95-21, Massachusetts Institute of Technology (MIT), Department of Economics.
    Other versions:
  4. Wouter J. den Haan & Garey Ramey & Joel Watson, 1999. "Contract-theoretic approaches to wages and displacement," Review, Federal Reserve Bank of St. Louis, issue May, pages 55-68. [Downloadable!]
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  5. Diamond, P. A. & Maskin, Eric, 1981. "An equilibrium analysis of search and breach of contract II. A non-steady state example," Journal of Economic Theory, Elsevier, vol. 25(2), pages 165-195, October. [Downloadable!] (restricted)
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  6. Ken Binmore & Ariel Rubinstein & Asher Wolinsky, 1986. "The Nash Bargaining Solution in Economic Modelling," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 176-188, Summer. [Downloadable!] (restricted)
  7. H. Lorne Carmichael & W. Bentley MacLeod, 1997. "Gift Giving and the Evolution of Cooperation," Boston College Working Papers in Economics 338., Boston College Department of Economics. [Downloadable!]
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  8. Peter A. Diamond & Eric Maskin, 1979. "An Equilibrium Analysis of Search and Breach of Contract, I: Steady States," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 282-316, Spring. [Downloadable!] (restricted)
  9. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law & Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  10. Saikat Datta, 1996. "Building Trust," STICERD - Theoretical Economics Paper Series 305, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  11. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
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  12. Ramey, Garey & Watson, Joel, 1997. "Contractual Fragility, Job Destruction, and Business Cycles," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 873-911, August.
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  13. Ghosh, Parikshit & Ray, Debraj, 1996. "Cooperation in Community Interaction without Information Flows," Review of Economic Studies, Blackwell Publishing, vol. 63(3), pages 491-519, July. [Downloadable!] (restricted)
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  14. McMillan, John & Woodruff, Christopher, 1999. "Dispute Prevention without Courts in Vietnam," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 637-58, October.
  15. Wouter den Haan & Garey Ramey & Joel Watson, 1999. "Contract-Theoretic Approaches to Wages and Displacement," University of California at San Diego, Economics Working Paper Series 1999-02, Department of Economics, UC San Diego. [Downloadable!]
  16. Kranton, Rachel E, 1996. "The Formation of Cooperative Relationships," Journal of Law, Economics and Organization, Oxford University Press, vol. 12(1), pages 214-33, April.
  17. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June. [Downloadable!] (restricted)
  18. Watson, Joel, 1999. "Starting Small and Renegotiation," Journal of Economic Theory, Elsevier, vol. 85(1), pages 52-90, March. [Downloadable!] (restricted)
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  19. Maija Halonen, 1995. "Reputation and Allocation of Ownership," STICERD - Theoretical Economics Paper Series 289, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
  20. John McMillan & Christopher Woodruff, 1999. "Interfirm Relationships And Informal Credit In Vietnam," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1285-1320, November. [Downloadable!] (restricted)
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  21. den Haan, Wouter J. & Ramey, Garey & Watson, Joel, 2000. "Job destruction and the experiences of displaced workers," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 52(1), pages 87-128, June. [Downloadable!] (restricted)
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  22. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August. [Downloadable!] (restricted)
  23. Diamond, Peter, 1990. "Pairwise Credit in Search Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 285-319, May. [Downloadable!] (restricted)
  24. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Leonardo Felli & Kevin Roberts, . "Does Competition Solve the Hold-up Problem?," Penn CARESS Working Papers 4a7d448e61f494c5472087aed, UCLA Department of Economics. [Downloadable!]
    Other versions:
  2. Johnson, Simon & McMillan, John & Woodruff, Christopher, 1999. "Contract Enforcement in Transition," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  3. J Rauch & Joel Watson, 1999. "Starting Small in an Unfamiliar Environment," University of California at San Diego, Economics Working Paper Series 1996-28R, Department of Economics, UC San Diego. [Downloadable!]
  4. James E. Rauch & Joel Watson, 1999. "Starting Small in an Unfamiliar Environment," NBER Working Papers 7053, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Legros, Patrick & Newman, Andrew, 2000. "Competing for Ownership," CEPR Discussion Papers 2573, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Matouschek, Niko & Ramezzana, Paolo & Robert-Nicoud, Frédéric, 2004. "Labour Market Frictions, Job Insecurity and the Flexibility of the Employment Relationship," CEPR Discussion Papers 4193, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Garey Ramey & Joel Watson, 1996. "Contractual Fragility, Job Destruction and Business Cycles," University of California at San Diego, Economics Working Paper Series 96-22, Department of Economics, UC San Diego. [Downloadable!]
    Other versions:
  8. John McMillan & Christopher Woodruff, 2002. "The Central Role of Entrepreneurs in Transition Economies," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 153-170, Summer. [Downloadable!] (restricted)
  9. Leora Friedberg & Michael Owyang & Tara Sinclair, 2006. "Searching For Better Prospects: Endogenizing Falling Job Tenure and Private Pension Coverage," Topics in Economic Analysis & Policy, Berkeley Electronic Press, vol. 6(1), pages 1500-1500. [Downloadable!] (restricted)
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  10. Lewin-Solomons, S., 2003. "Market-induced Asset Specificity: Redefining the Hold-up Problem," Cambridge Working Papers in Economics 0304, Faculty of Economics, University of Cambridge. [Downloadable!]
  11. Niko Matouschek & Paolo Ramezzana, 2004. "Labor Market Frictions, Job Insecurity, and the Flexibility of the Employment Relationship," Econometric Society 2004 North American Summer Meetings 28, Econometric Society. [Downloadable!]
  12. Joel Watson, 2006. "Contract and Game Theory: Basic Concepts for Settings with Finite Horizons," University of California at San Diego, Economics Working Paper Series 2006-01, Department of Economics, UC San Diego. [Downloadable!]
  13. Kalyan Chatterjee & Y. Chiu, 2007. "When Does Competition Lead to Efficient Investments?," Topics in Theoretical Economics, Berkeley Electronic Press, vol. 7(1), pages 1220-1220. [Downloadable!] (restricted)
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