IDEAS home Printed from https://ideas.repec.org/p/fem/femwpa/2004.78.html
   My bibliography  Save this paper

Contracting with Externalities and Outside Options

Author

Listed:
  • Francis Bloch

    (Ecole Supérieure de Mécanique de Marseille and GREQAM)

  • Armando Gomes

    (Department of Finance, the Wharton School, University of Pennsylvania)

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.

Suggested Citation

  • Francis Bloch & Armando Gomes, 2004. "Contracting with Externalities and Outside Options," Working Papers 2004.78, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2004.78
    as

    Download full text from publisher

    File URL: https://feem-media.s3.eu-central-1.amazonaws.com/wp-content/uploads/NDL2004-078.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, vol. 78(5), pages 1133-1137, December.
    2. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    3. Armando Gomes & Philippe Jehiel, 2005. "Dynamic Processes of Social and Economic Interactions: On the Persistence of Inefficiencies," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 626-667, June.
    4. Genicot, Garance & Ray, Debraj, 2006. "Contracts and externalities: How things fall apart," Journal of Economic Theory, Elsevier, vol. 131(1), pages 71-100, November.
    5. Kalyan Chatterjee & Bhaskar Dutia & Debraj Ray & Kunal Sengupta, 2013. "A Noncooperative Theory of Coalitional Bargaining," World Scientific Book Chapters, in: Bargaining in the Shadow of the Market Selected Papers on Bilateral and Multilateral Bargaining, chapter 5, pages 97-111, World Scientific Publishing Co. Pte. Ltd..
    6. Akira Okada, 2000. "The Efficiency Principle in Non-Cooperative Coalitional Bargaining," The Japanese Economic Review, Japanese Economic Association, vol. 51(1), pages 34-50, March.
    7. Debraj Ray & Rajiv Vohra, 1998. "A Theory of Endogenous Coalition Structures," Working Papers 98-1, Brown University, Department of Economics, revised Jan 1998.
    8. Gul, Faruk, 1989. "Bargaining Foundations of Shapley Value," Econometrica, Econometric Society, vol. 57(1), pages 81-95, January.
    9. Ray, Debraj & Vohra, Rajiv, 1999. "A Theory of Endogenous Coalition Structures," Games and Economic Behavior, Elsevier, vol. 26(2), pages 286-336, January.
    10. Maria Montero, 2023. "Coalition Formation in Games with Externalities," Dynamic Games and Applications, Springer, vol. 13(2), pages 525-548, June.
    11. Okada, Akira, 1996. "A Noncooperative Coalitional Bargaining Game with Random Proposers," Games and Economic Behavior, Elsevier, vol. 16(1), pages 97-108, September.
    12. Kamien, Morton I & Muller, Eitan & Zang, Israel, 1992. "Research Joint Ventures and R&D Cartels," American Economic Review, American Economic Association, vol. 82(5), pages 1293-1306, December.
    13. John Sutton, 1986. "Non-Cooperative Bargaining Theory: An Introduction," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(5), pages 709-724.
    14. Perry, Motty & Reny, Philip J, 1994. "A Noncooperative View of Coalition Formation and the Core," Econometrica, Econometric Society, vol. 62(4), pages 795-817, July.
    15. Shaked, Avner & Sutton, John, 1984. "Involuntary Unemployment as a Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 52(6), pages 1351-1364, November.
    16. Konishi, Hideo & Ray, Debraj, 2003. "Coalition formation as a dynamic process," Journal of Economic Theory, Elsevier, vol. 110(1), pages 1-41, May.
    17. Debraj Ray and Rajiv Vohra, 1998. "Coalitional Power and Public Goods," Working Papers 98-24, Brown University, Department of Economics.
    18. Russell Cooper & Douglas V. DeJong & Robert Forsythe & Thomas W. Ross, 1992. "Communication in Coordination Games," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 739-771.
    19. Bloch, Francis, 1996. "Sequential Formation of Coalitions in Games with Externalities and Fixed Payoff Division," Games and Economic Behavior, Elsevier, vol. 14(1), pages 90-123, May.
    20. repec:fth:tilbur:99121 is not listed on IDEAS
    21. Ilya Segal, 1999. "Contracting with Externalities," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(2), pages 337-388.
    22. Daniel J. Seidmann & Eyal Winter, 1998. "A Theory of Gradual Coalition Formation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(4), pages 793-815.
    23. Debraj Ray & Rajiv Vohra, 2001. "Coalitional Power and Public Goods," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1355-1384, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Raphaël Soubeyran, 2019. "Technology adoption and pro-social preferences," CEE-M Working Papers halshs-02291905, CEE-M, Universtiy of Montpellier, CNRS, INRA, Montpellier SupAgro.
    2. Bellelli, Francesco S. & Scarpa, Riccardo & Aftab, Ashar, 2023. "An empirical analysis of participation in international environmental agreements," Journal of Environmental Economics and Management, Elsevier, vol. 118(C).
    3. Eguia, Jon X., 2011. "Voting blocs, party discipline and party formation," Games and Economic Behavior, Elsevier, vol. 73(1), pages 111-135, September.
    4. Ellingsen, Tore & Paltseva, Elena, 2012. "The private provision of excludable public goods: An inefficiency result," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 658-669.
    5. Maria Montero, 2023. "Coalition Formation in Games with Externalities," Dynamic Games and Applications, Springer, vol. 13(2), pages 525-548, June.
    6. Matteo M. Galizzi, 2009. "Bargaining and Networks in a Gas Bilateral Oligopoly," Working Papers 0906, University of Brescia, Department of Economics.
    7. Ilya Segal & Michael D.Whinston, 2012. "Property Rights [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    8. Carraro, Carlo & Marchiori, Carmen & Sgobbi, Alessandra, 2005. "Advances in negotiation theory : bargaining, coalitions, and fairness," Policy Research Working Paper Series 3642, The World Bank.
    9. Vartiainen, Hannu, 2011. "Dynamic coalitional equilibrium," Journal of Economic Theory, Elsevier, vol. 146(2), pages 672-698, March.
    10. Maruta, Toshimasa & Okada, Akira, 2012. "Dynamic group formation in the repeated prisonerʼs dilemma," Games and Economic Behavior, Elsevier, vol. 74(1), pages 269-284.
    11. Christoph Jeßberger, 2011. "Multilateral Environmental Agreements up to 2050: Are They Sustainable Enough?," ifo Working Paper Series 98, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    12. Ray, Debraj & Vohra, Rajiv, 2015. "Coalition Formation," Handbook of Game Theory with Economic Applications,, Elsevier.
    13. Raphael Soubeyran, 2019. "Incentives, Pro-social Preferences and Discrimination," Working Papers 2019.04, FAERE - French Association of Environmental and Resource Economists.
    14. Anna A. Klis, 2019. "Identity and equal treatment in negative externality agreements," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 19(6), pages 615-630, December.
    15. Omer Biran, 2013. "Strategic collusion in auctions with externalities," Theory and Decision, Springer, vol. 75(1), pages 117-136, July.
    16. Galizzi, Matteo M. & Miraldo, Marisa, 2011. "The effects of hospitals' governance on optimal contracts: Bargaining vs. contracting," Journal of Health Economics, Elsevier, vol. 30(2), pages 408-424, March.
    17. Akira Okada, 2018. "Non-cooperative Bargaining for Side Payments Contract," KIER Working Papers 983, Kyoto University, Institute of Economic Research.
    18. Robert Gibbons & John Roberts, 2012. "The Handbook of Organizational Economics," Economics Books, Princeton University Press, edition 1, volume 1, number 9889.
    19. Peter Egger & Christoph Jeßberger & Mario Larch, 2011. "Trade and investment liberalization as determinants of multilateral environmental agreement membership," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(6), pages 605-633, December.
    20. Biran, Omer, 2011. "Mécanismes d'échange en présence d'externalités," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/7238 edited by Forges, Françoise.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ray, Debraj & Vohra, Rajiv, 2015. "Coalition Formation," Handbook of Game Theory with Economic Applications,, Elsevier.
    2. Akira Okada, 2015. "Cooperation and Institution in Games," The Japanese Economic Review, Japanese Economic Association, vol. 66(1), pages 1-32, March.
    3. Maria Montero, 2023. "Coalition Formation in Games with Externalities," Dynamic Games and Applications, Springer, vol. 13(2), pages 525-548, June.
    4. Roy Chowdhury, Prabal & Sengupta, Kunal, 2012. "Transparency, complementarity and holdout," Games and Economic Behavior, Elsevier, vol. 75(2), pages 598-612.
    5. Gomes, Armando, 2015. "Multilateral negotiations and formation of coalitions," Journal of Mathematical Economics, Elsevier, vol. 59(C), pages 77-91.
    6. Okada, Akira, 2010. "The Nash bargaining solution in general n-person cooperative games," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2356-2379, November.
    7. Armando Gomes & Wilfredo Maldonado, 2020. "Mergers and acquisitions with conditional and unconditional offers," International Journal of Game Theory, Springer;Game Theory Society, vol. 49(3), pages 773-800, September.
    8. Roy Chowdhury, Prabal & Sengupta, Kunal, 2008. "Multi-person Bargaining With Complementarity: Is There Holdout?," MPRA Paper 11517, University Library of Munich, Germany.
    9. Yildirim, Huseyin, 2007. "Proposal power and majority rule in multilateral bargaining with costly recognition," Journal of Economic Theory, Elsevier, vol. 136(1), pages 167-196, September.
    10. Francis Bloch & Effrosyni Diamantoudi, 2011. "Noncooperative formation of coalitions in hedonic games," International Journal of Game Theory, Springer;Game Theory Society, vol. 40(2), pages 263-280, May.
    11. Iaryczower, Matias & Oliveros, Santiago, 2016. "Power brokers: Middlemen in legislative bargaining," Journal of Economic Theory, Elsevier, vol. 162(C), pages 209-236.
    12. Carraro, Carlo & Marchiori, Carmen & Sgobbi, Alessandra, 2005. "Advances in negotiation theory : bargaining, coalitions, and fairness," Policy Research Working Paper Series 3642, The World Bank.
    13. Akira Okada, 2023. "Dynamic bargaining with voluntary participation and externalities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 75(2), pages 427-452, February.
    14. László Á. Kóczy, 2018. "Partition Function Form Games," Theory and Decision Library C, Springer, number 978-3-319-69841-0, March.
    15. Inés Macho-Stadler & David Pérez-Castrillo & Nicol? Porteiro, 2002. "Sequential Formation of Coalitions through Bilateral Agreements," UFAE and IAE Working Papers 515.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    16. Olivier Compte & Philippe Jehiel, 2010. "The Coalitional Nash Bargaining Solution," Econometrica, Econometric Society, vol. 78(5), pages 1593-1623, September.
    17. Messan Agbaglah, 2017. "Overlapping coalitions, bargaining and networks," Theory and Decision, Springer, vol. 82(3), pages 435-459, March.
    18. Licun Xue & Lingling Zhang, 2012. "Bidding and sequential coalition formation with externalities," International Journal of Game Theory, Springer;Game Theory Society, vol. 41(1), pages 49-73, February.
    19. Greg Leo & Yevgeniy Vorobeychik & Myrna Wooders, 2023. "Subgame Perfect Coalition Formation," Dynamic Games and Applications, Springer, vol. 13(2), pages 510-524, June.
    20. Armando Gomes, "undated". "A Theory of Negotiations and Formation of Coalitions," Rodney L. White Center for Financial Research Working Papers 21-99, Wharton School Rodney L. White Center for Financial Research.

    More about this item

    Keywords

    Outside options; Externalities; Coalitional bargaining;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fem:femwpa:2004.78. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Alberto Prina Cerai (email available below). General contact details of provider: https://edirc.repec.org/data/feemmit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.