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Relational Contracting, Repeated Negotiations, and Hold-Up

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  • Sebastian Kranz

Abstract

We propose a unified framework to study relational contracting and hold-up problems in infinite horizon stochastic games. We first illustrate that with respect to long run decisions, the common formulation of relational contracts as Pareto-optimal public perfect equilibria is in stark contrast to fundamental assumptions of hold-up models. We develop a model in which relational contracts are repeatedly newly negotiated during relationships. Negotiations take place with positive probability and cause bygones to be bygones. Traditional relational contracting and hold-up formulations are nested as opposite corner cases. Allowing for intermediate cases yields very intuitive results and sheds light on many plausible trade-offs that do not arise in these corner cases. We establish a general existence result and a tractable characterization for stochastic games in which money can be transferred. --

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 786969000000000676.

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Date of creation: 11 Apr 2013
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Handle: RePEc:cla:levarc:786969000000000676

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  1. Prajit K. Dutta, 1997. "A Folk Theorem for Stochastic Games," Levine's Working Paper Archive 1000, David K. Levine.
  2. Kranz, Sebastian & Ohlendorf, Susanne, 2009. "Renegotiation-Proof Relational Contracts with Side Payments," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 259, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Farrell, Joseph & Maskin, Eric, 1989. "Renegotiation in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 327-360, December.
  4. Yeon-Koo Che & Tai-Yeong Chung, 1999. "Contract Damages and Cooperative Investments," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 84-105, Spring.
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  7. Blonski, Matthias & Spagnolo, Giancarlo, 2002. "Relational Contracts and Property Rights," CEPR Discussion Papers 3460, C.E.P.R. Discussion Papers.
  8. Georg Nöldeke & Klaus M. Schmidt, 1992. "Option Contracts and Renegotiation - A Solution to the Hold-Up Problem," Discussion Paper Serie A 417, University of Bonn, Germany, revised Aug 1993.
  9. Che,Y.-K. & Sakovics,J., 2001. "A dynamic theory of holdup," Working papers, Wisconsin Madison - Social Systems 25, Wisconsin Madison - Social Systems.
  10. Douglas Bernheim, B. & Ray, Debraj, 1989. "Collective dynamic consistency in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 295-326, December.
  11. Sebastian Kranz, 2012. "Discounted Stochastic Games with Voluntary Transfers," Cowles Foundation Discussion Papers 1847, Cowles Foundation for Research in Economics, Yale University.
  12. Maija Halonen, 2002. "Reputation And The Allocation Of Ownership," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(481), pages 539-558, July.
  13. Ohlendorf, Susanne, 2008. "Expectation Damages, Divisible Contracts, and Bilateral Investment," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 231, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  14. Jonathan Levin, 2002. "Multilateral Contracting And The Employment Relationship," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(3), pages 1075-1103, August.
  15. Maskin, Eric & Tirole, Jean, 2001. "Markov Perfect Equilibrium: I. Observable Actions," Journal of Economic Theory, Elsevier, vol. 100(2), pages 191-219, October.
  16. Pitchford, Rohan & Snyder, Christopher M., 2004. "A solution to the hold-up problem involving gradual investment," Journal of Economic Theory, Elsevier, vol. 114(1), pages 88-103, January.
  17. Fudenberg, Drew & Yamamoto, Yuichi, 2011. "The Folk Theorem for Irreducible Stochastic Games with Imperfect Public Monitoring," Scholarly Articles 8896226, Harvard University Department of Economics.
  18. Goldlücke, Susanne & Kranz, Sebastian, 2012. "Infinitely repeated games with public monitoring and monetary transfers," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1191-1221.
  19. Goldlücke, Susanne & Kranz, Sebastian, 2013. "Renegotiation-proof relational contracts," Games and Economic Behavior, Elsevier, vol. 80(C), pages 157-178.
  20. Ramey, Garey & Watson, Joel, 1997. "Contractual Fragility, Job Destruction, and Business Cycles," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(3), pages 873-911, August.
  21. Ellingsen, Tore & Johannesson, Magnus, 2000. "Is There a Hold-up Problem?," Working Paper Series in Economics and Finance 357, Stockholm School of Economics.
  22. Ellingsen, Tore & Robles, Jack, 2000. "Does Evolution Solve the Hold-up Problem?," Working Paper Series in Economics and Finance 358, Stockholm School of Economics.
  23. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
  24. Baliga, Sandeep & Evans, Robert, 2000. "Renegotiation in Repeated Games with Side-Payments," Games and Economic Behavior, Elsevier, vol. 33(2), pages 159-176, November.
  25. Andrew Ching, 2004. "A Dynamic Oligopoly Structural Model for the Prescription Drug Market After Patent Expiration," Econometric Society 2004 Far Eastern Meetings, Econometric Society 735, Econometric Society.
  26. Johannes Hörner & Takuo Sugaya & Satoru Takahashi & Nicolas Vieille, 2011. "Recursive Methods in Discounted Stochastic Games: An Algorithm for δ→ 1 and a Folk Theorem," Econometrica, Econometric Society, Econometric Society, vol. 79(4), pages 1277-1318, 07.
  27. Binmore, Ken & Shaked, Avner & Sutton, John, 1989. "An Outside Option Experiment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(4), pages 753-70, November.
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