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An Equilibrium Analysis of Search and Breach of Contract, I: Steady States

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  • Peter A. Diamond
  • Eric Maskin

Abstract

We study the steady-state equilibrium of models where individuals meet pairwise in a costly stochastic search process and negotiate contracts to product output. Different meetings yield different outputs, and so an individual in a contract may wish to continue search to find a better match. If he is successful, he will break his original contract. In anticipation of possible breaches, contracts may provide for compensation to be paid to the breached-against partner. We examine the effects that several alternative damage rules have on equilibrium search and breach behavior.

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  • Peter A. Diamond & Eric Maskin, 1979. "An Equilibrium Analysis of Search and Breach of Contract, I: Steady States," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 282-316, Spring.
  • Handle: RePEc:rje:bellje:v:10:y:1979:i:spring:p:282-316
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