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Contractual Externalities and Common Agency Equilibria

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  • Martimort, David
  • Stole, Lars

Abstract

This paper characterizes the equilibrium sets of an intrinsic common agency game with direct exter-nalities between principals both under complete and asymmetric information. Direct externalities arise when the contracting variable of one principal affects directly the other principal’s payoff. Out-of-equilibrium messages are used by principals to precommit themselves to distort their strategic behavior. We characterize pure-strategy symmetric equilibria arising in such games under complete information and show their multiplicity. We then introduce asymmetric information to refine the set of feasible conjectures. We show that a unique equilibrium may be selected by conveniently perturbing the information structure. Both under complete and asymmetric information, we show that the equilibrium outputs of the intrinsic common agency game are also equilibrium outputs of the delegated common agency game, although the two games differ in terms of the distribution of surplus they involve.

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Bibliographic Info

Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 110.

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Date of creation: 1999
Date of revision: 2003
Publication status: Published in Advances in Theoretical Economics, vol.�3, n°1, 2003.
Handle: RePEc:ide:wpaper:630

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  22. Chaim Fershtman & Kenneth L. Judd & Ehud Kalai, 1990. "Observable Contracts: Strategic Delegation and Cooperation," Discussion Papers 879, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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