Trilateral Contract and the Hold-up Problem
AbstractWe present a novel solution for the hold up problem, when more than two parties are involved. The case we consider is a company selling identical products to two buyers that have a common interest in inducing the seller to make a quality enhancing investment. We show that a trilateral contract may provide the correct incentives to restore optimal efficiency. The contract induces a coalition proof Nash equilibrium and holds under complete as well as incomplete information. The extension to more than two buyers is straightforward.
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Bibliographic InfoPaper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0126.
Length: 17 pages
Date of creation: Jan 2011
Date of revision:
Multilateral Contract; Trilateral Contract; Hold-up Problem.;
Find related papers by JEL classification:
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-08-15 (All new papers)
- NEP-CTA-2011-08-15 (Contract Theory & Applications)
- NEP-MIC-2011-08-15 (Microeconomics)
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