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Expectations of Bailout and Collective Moral Hazard

Listed author(s):
  • Milan Horniaček

    ()

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

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    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.

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    Article provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its journal Czech Economic Review.

    Volume (Year): 8 (2014)
    Issue (Month): 1 (August)
    Pages: 33-54

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    Handle: RePEc:fau:aucocz:au2014_033
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    1. Drew Fudenberg & David K. Levine & Eric Maskin, 1994. "The Folk Theorem with Imperfect Public Information," Levine's Working Paper Archive 2058, David K. Levine.
    2. Joseph Farrell and Eric Maskin., 1987. "Renegotiation in Repeated Games," Economics Working Papers 8759, University of California at Berkeley.
    3. Douglas Bernheim, B. & Ray, Debraj, 1989. "Collective dynamic consistency in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 295-326, December.
    4. Evans, Robert & Maskin, Eric, 1989. "Efficient renegotiation--proof equilibria in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 361-369, December.
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