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Strategic exits in stochastic partnerships: the curse of profitability

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  • Xu, Boli

    (Department of Economics, Tippie College of Business, University of Iowa)

Abstract

We study dynamic partnerships where the output evolves stochastically, each player can exit at any time, and players who have exited continue to accrue some benefits if the remaining players keep contributing to the partnership. Players can strategically exit to free-ride on their partners' contributions, knowing that it may trigger subsequent exits of their partners. We characterize the unique Pareto-optimal equilibrium. When players have sufficiently large free-riding incentives and a medium level of mutual reliance, this equilibrium exhibits a curse of profitability: An increase in the partnership's output may strictly harm all the players. Another main finding is that Pareto-improvement can be achieved if any player commits not to exit first.

Suggested Citation

  • Xu, Boli, 0. "Strategic exits in stochastic partnerships: the curse of profitability," Theoretical Economics, Econometric Society.
    • Handle: RePEc:the:publsh:6111
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    Keywords

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    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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