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Contracts and Externalities: How Things Fall Apart

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  • Garance Genicot
  • Debraj Ray

Abstract

A single principal interacts with several agents, offering them contracts. The crucial assumption of this paper is that the outside-option payoffs of the agents depend positively on how many free agents there are (these are agents who are not under contract). We study how such a principal, unwelcome though he may be, approaches the problem of contract provision to agents when coordination failure among the latter group is explicitly ruled out. Two variants are studied. When the principal cannot re-approach agents, there is a unique equilibrium, in which contract provision is split up into two phases. In phase 1, simultaneous offers at good (though varying)terms are made to a number of agents. In phase 2, offers must be made sequentially, and their values are discontinuously lower: they are close to the very lowest of all the outside options. When the principal can repeatedly approach the same agent, there is a multiplicity of equilibria. In some of these, the agents have the power to force delay. They can hold off the principals overtures temporarily, but they must succumb in finite time. Furthermore, even though the maximal delay does go to infinity as the discount factor approaches one, the (discount-normalized) payoff of the agents must stay below and bounded away from the fully free reservation payoff. It is in this sense that things [eventually] fall apart as far as the agents are concerned.

(This abstract was borrowed from another version of this item.)

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 506439000000000235.

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Date of creation: 06 Feb 2003
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Handle: RePEc:cla:levarc:506439000000000235

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  1. Jehiel, Philippe & Moldovanu, Benny, 1995. "Cyclical Delay in Bargaining with Externalities," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 619-37, October.
  2. Rasmusen, Eric B & Ramseyer, J Mark & Wiley, John S, Jr, 1991. "Naked Exclusion," American Economic Review, American Economic Association, vol. 81(5), pages 1137-45, December.
  3. Innes, Robert & Sexton, Richard J, 1994. "Strategic Buyers and Exclusionary Contracts," American Economic Review, American Economic Association, vol. 84(3), pages 566-84, June.
  4. Jehiel, Philippe & Moldovanu, Benny, 1995. "Negative Externalities May Cause Delay in Negotiation," Econometrica, Econometric Society, vol. 63(6), pages 1321-35, November.
  5. Ray, D. & Vohra, R., 1996. "A Theory of Endogenous Coalition Structure," Papers 68, Boston University - Industry Studies Programme.
  6. Genicot, Garance, 2002. "Bonded labor and serfdom: a paradox of voluntary choice," Journal of Development Economics, Elsevier, vol. 67(1), pages 101-127, February.
  7. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March.
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Cited by:
  1. Currarini, Sergio & Feri, Francesco, 2006. "Delegation versus centralization: The role of externalities," Research in Economics, Elsevier, vol. 60(2), pages 112-119, June.
  2. Bloch, Francis & Gomes, Armando, 2006. "Contracting with externalities and outside options," Journal of Economic Theory, Elsevier, vol. 127(1), pages 172-201, March.
  3. James Bland & Nikos Nikiforakis, 2013. "Tacit Coordination in Games with Third-Party Externalities," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2013_19, Max Planck Institute for Research on Collective Goods.
  4. Pierre Dupraz & Karine Latouche & Nadine Turpin, 2007. "Programmes agri-environnementaux en présence d’effets de seuil," Cahiers d'Economie et Sociologie Rurales, INRA Department of Economics, vol. 82, pages 5-32.
  5. Galasso, Alberto, 2008. "Coordination and bargaining power in contracting with externalities," Journal of Economic Theory, Elsevier, vol. 143(1), pages 558-570, November.
  6. Bård Harstad, 2011. "The Market for Conservation and Other Hostages," NBER Working Papers 17409, National Bureau of Economic Research, Inc.
  7. BELLEFLAMME, Paul & TOULEMONDE, Eric, 2007. "Negative intra-group externalities in two-sided markets," CORE Discussion Papers 2007039, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Carsten Helm & Franz Wirl, 2011. "International Environmental Agreements: Incentive Contracts with Multilateral Externalities," Working Papers V-336-11, University of Oldenburg, Department of Economics, revised Jun 2011.
  9. Krasteva, Silvana & Yildirim, Huseyin, 2012. "On the role of confidentiality and deadlines in bilateral negotiations," Games and Economic Behavior, Elsevier, vol. 75(2), pages 714-730.
  10. repec:old:wpaper:336-11 is not listed on IDEAS
  11. Mike Felgenhauer & Hans Grüner, 2007. "Distortionary lobbying," Economics of Governance, Springer, vol. 8(3), pages 181-195, May.
  12. Csorba, Gergely, 2008. "Contracting with asymmetric information in the presence of positive network effects: Screening and divide-and-conquer techniques," Information Economics and Policy, Elsevier, vol. 20(1), pages 54-66, March.
  13. Galasso, Alberto, 2010. "Over-confidence may reduce negotiation delay," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 716-733, December.

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