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Expectations of Bailout and Collective Moral Hazard

Author

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  • Milan Horniaček

    (Comenius University in Bratislava, Faculty of Social and Economic Sciences, Bratislava, the Slovak Republic)

Abstract

We analyze an infinite horizon stochastic game with discounting of future single period payoffs that models interaction between Cournot duopolists producing differentiated products. There are two states of demand for an output of each firm. The probabilities of their occurrence depend on random factors and on investing or not investing into product innovation. If the low state of demand occurs for an output of each firm, then the government not observing firms’ investments into product innovation bails out each firm with a positive output. A weakly renegotiation-proof perfect public equilibrium is the solution concept that we apply. It is a perfect public equilibrium in which no two replaceable continuation equilibrium payoff vectors are strictly Pareto ranked. Taking into account expected bailout, there exists a weakly renegotiationproof perfect public equilibrium with a strictly Pareto efficient equilibrium payoff vector, in which, along the equilibrium path, the firms collude on not investing int o product innovation.

Suggested Citation

  • Milan Horniaček, 2014. "Expectations of Bailout and Collective Moral Hazard," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 8(1), pages 33-54, August.
  • Handle: RePEc:fau:aucocz:au2014_033
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    References listed on IDEAS

    as
    1. Drew Fudenberg & David Levine & Eric Maskin, 2008. "The Folk Theorem With Imperfect Public Information," World Scientific Book Chapters, in: Drew Fudenberg & David K Levine (ed.), A Long-Run Collaboration On Long-Run Games, chapter 12, pages 231-273, World Scientific Publishing Co. Pte. Ltd..
    2. Farrell, Joseph & Maskin, Eric, 1989. "Renegotiation in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 327-360, December.
    3. Evans, Robert & Maskin, Eric, 1989. "Efficient renegotiation--proof equilibria in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 361-369, December.
    4. Douglas Bernheim, B. & Ray, Debraj, 1989. "Collective dynamic consistency in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 295-326, December.
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    More about this item

    Keywords

    Bailout; innovation; perfect public equilibrium; weakly renegotiation-proof equilibrium; stochastic game;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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