Contracts and externalities: How things fall apart
A single principal interacts with several agents, offering them contracts. The crucial assumption of this paper is that the outside-option payoffs of the agents depend positively on how many free agents there are (these are agents who are not under contract). We study how such a principal, unwelcome though he may be, approaches the problem of contract provision to agents when coordination failure among the latter group is explicitly ruled out. Two variants are studied. When the principal cannot re-approach agents, there is a unique equilibrium, in which contract provision is split up into two phases. In phase 1, simultaneous offers at good (though varying)terms are made to a number of agents. In phase 2, offers must be made sequentially, and their values are discontinuously lower: they are close to the very lowest of all the outside options. When the principal can repeatedly approach the same agent, there is a multiplicity of equilibria. In some of these, the agents have the power to force delay. They can hold off the principals overtures temporarily, but they must succumb in finite time. Furthermore, even though the maximal delay does go to infinity as the discount factor approaches one, the (discount-normalized) payoff of the agents must stay below and bounded away from the fully free reservation payoff. It is in this sense that things eventually fall apart as far as the agents are concerned.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Gomes, Armando R & Jehiel, Philippe, 2001. "Dynamic Processes of Social and Economic Interactions: On the Persistence of Inefficiencies," CEPR Discussion Papers 3012, C.E.P.R. Discussion Papers.
- Armo Gomes & Philippe Jehiel, 2001. "Dynamic Processes of Social and Economic Interactions: On the Persistence of Inefficiencies," Penn CARESS Working Papers 76ff153ae29996d16c454e473, Penn Economics Department.
- Jehiel, Philippe & Moldovanu, Benny, 1995. "Negative Externalities May Cause Delay in Negotiation," Econometrica, Econometric Society, vol. 63(6), pages 1321-1335, November.
- Jean-Jacques Laffont & Patrick Rey & Jean Tirole, 1998. "Network Competition: I. Overview and Nondiscriminatory Pricing," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 1-37, Spring.
- Rasmusen, Eric B & Ramseyer, J Mark & Wiley, John S, Jr, 1991. "Naked Exclusion," American Economic Review, American Economic Association, vol. 81(5), pages 1137-1145, December.
- Basu, Kaushik, 1986. "One Kind of Power," Oxford Economic Papers, Oxford University Press, vol. 38(2), pages 259-282, July.
- Pranab Bardhan, 1991. "On The Concept Of Power In Economics," Economics and Politics, Wiley Blackwell, vol. 3(3), pages 265-277, November.
- Ray, Debraj & Vohra, Rajiv, 1999. "A Theory of Endogenous Coalition Structures," Games and Economic Behavior, Elsevier, vol. 26(2), pages 286-336, January.
- Debraj Ray & Rajiv Vohra, 1996. "A Theory of Endogenous Coalition Structure," Papers 0068, Boston University - Industry Studies Programme.
- Debraj Ray & Rajiv Vohra, 1998. "A Theory of Endogenous Coalition Structures," Working Papers 98-1, Brown University, Department of Economics, revised Jan 1998.
- Ray, D. & Vohra, R., 1996. "A Theory of Endogenous Coalition Structure," Papers 68, Boston University - Industry Studies Programme.
- Gale, Douglas, 1995. "Dynamic Coordination Games," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 5(1), pages 1-18, January.
- Gale, D., 1992. "Dynamic Coordiantion Games," Papers 13, Boston University - Department of Economics.
- Makowski, Louis, 1980. "Perfect competition, the profit criterion, and the organization of economic activity," Journal of Economic Theory, Elsevier, vol. 22(2), pages 222-242, April.
- Philippe Jehiel & Benny Moldovanu, 1995. "Cyclical Delay in Bargaining with Externalities," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 619-637.
- Jehiel, Philippe & Benny Moldovanu, 1993. "Cyclical Delay in Bargaining with "Externalities"," Discussion Paper Serie B 234, University of Bonn, Germany.
- Genicot, Garance, 2002. "Bonded labor and serfdom: a paradox of voluntary choice," Journal of Development Economics, Elsevier, vol. 67(1), pages 101-127, February.
- Ilya Segal, 1999. "Contracting with Externalities," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 337-388.
- Durham, Yvonne & Hirshleifer, Jack & Smith, Vernon L., 2008. "The Paradox of Power," Handbook of Experimental Economics Results, Elsevier.
- Jack Hirshleifer, 1991. "The Paradox Of Power," Economics and Politics, Wiley Blackwell, vol. 3(3), pages 177-200, November.
- Oliver D. Hart & Jean Tirole, 1988. "Contract Renegotiation and Coasian Dynamics," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 509-540.
- Oliver D. Hart & Jean Tirole, 1987. "Contract Renegotiation and Coasian Dynamics," Working papers 442, Massachusetts Institute of Technology (MIT), Department of Economics.
- Segal, Ilya, 2003. "Coordination and discrimination in contracting with externalities: divide and conquer?," Journal of Economic Theory, Elsevier, vol. 113(2), pages 147-181, December.
- Michael D. Whinston & Ilya R. Segal, 2000. "Naked Exclusion: Comment," American Economic Review, American Economic Association, vol. 90(1), pages 296-309, March.
- McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-230, March.
- Innes, Robert & Sexton, Richard J, 1994. "Strategic Buyers and Exclusionary Contracts," American Economic Review, American Economic Association, vol. 84(3), pages 566-584, June. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:jetheo:v:131:y:2006:i:1:p:71-100. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.