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Contracting with externalities and outside options

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  • Bloch, Francis
  • Gomes, Armando

Abstract

This paper proposes a model of multilateral contracting where players are engaged in two parallel interactions: they dynamically form coalitions and play a repeated normal form game with temporary and permanent decisions. This formulation encompasses many economic models with externalities and outside options. We show that when outside options are pure (i.e. independent of the actions of other players), there exists a Markov Perfect equilibrium resulting in efficient outcomes when players become perfectly patient. If outside options are not pure, all Markov perfect equilibria may be inefficient. The distribution of coalitional gains and the dynamics of coalition formation are characterized in four illustrative applications.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 127 (2006)
Issue (Month): 1 (March)
Pages: 172-201

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Handle: RePEc:eee:jetheo:v:127:y:2006:i:1:p:172-201

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Web page: http://www.elsevier.com/locate/inca/622869

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  1. Debraj Ray & Rajiv Vohra, 2001. "Coalitional Power and Public Goods," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(6), pages 1355-1384, December.
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Cited by:
  1. Maruta, Toshimasa & Okada, Akira, 2012. "Dynamic group formation in the repeated prisonerʼs dilemma," Games and Economic Behavior, Elsevier, vol. 74(1), pages 269-284.
  2. Carlo Carraro & Carmen Marchiori & Alessandra Sgobbi, 2006. "Advances in Negotiation Theory: Bargaining, Coalitions and Fairness," Working Papers 2006_08, Department of Economics, University of Venice "Ca' Foscari".
  3. Christoph Jeßberger, 2011. "Multilateral Environmental Agreements up to 2050: Are They Sustainable Enough?," Ifo Working Paper Series Ifo Working Paper No. 98, Ifo Institute for Economic Research at the University of Munich.
  4. Robert Gibbons, Editor & John Roberts, Editor, 2012. "The Handbook of Organizational Economics," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 9889.
  5. Omer Biran, 2013. "Strategic collusion in auctions with externalities," Theory and Decision, Springer, Springer, vol. 75(1), pages 117-136, July.
  6. Eguia, Jon X., 2011. "Voting blocs, party discipline and party formation," Games and Economic Behavior, Elsevier, vol. 73(1), pages 111-135, September.
  7. Vartiainen, Hannu, 2011. "Dynamic coalitional equilibrium," Journal of Economic Theory, Elsevier, Elsevier, vol. 146(2), pages 672-698, March.
  8. Biran, Omer, 2011. "Mécanismes d'échange en présence d'externalités," Economics Thesis from University Paris Dauphine, Paris Dauphine University, Paris Dauphine University, number 123456789/7238 edited by Forges, Françoise.
  9. Galizzi, Matteo M. & Miraldo, Marisa, 2011. "The effects of hospitals' governance on optimal contracts: Bargaining vs. contracting," Journal of Health Economics, Elsevier, Elsevier, vol. 30(2), pages 408-424, March.
  10. Peter Egger & Christoph Jeßberger & Mario Larch, 2011. "Trade and investment liberalization as determinants of multilateral environmental agreement membership," International Tax and Public Finance, Springer, Springer, vol. 18(6), pages 605-633, December.
  11. Ellingsen, Tore & Paltseva, Elena, 2012. "The private provision of excludable public goods: An inefficiency result," Journal of Public Economics, Elsevier, Elsevier, vol. 96(9-10), pages 658-669.
  12. Matteo M. Galizzi, 2009. "Bargaining and Networks in a Gas Bilateral Oligopoly," Working Papers, University of Brescia, Department of Economics 0906, University of Brescia, Department of Economics.
  13. Debraj Ray & Rajiv Vohra, 2013. "Coalition Formation," Working Papers 2013-1, Brown University, Department of Economics.

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