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Contracting with Third Parties

  • Sandeep Baliga
  • Tomas Sjöström

In bilateral holdup and moral hazard in teams models, introducing a third party allows implementation of the first best, even if renegotiation is possible. Fines paid to the third party provide incentives for truth-telling and investment. This result holds even if the third party is corruptible, as long as the grand coalition has access to the same contracting technology as any colluding subcoalition. (JEL D86, D82)

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Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

Volume (Year): 1 (2009)
Issue (Month): 1 (February)
Pages: 75-100

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Handle: RePEc:aea:aejmic:v:1:y:2009:i:1:p:75-100
Note: DOI: 10.1257/mic.1.1.75
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