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Contracting With Externalities

  • Ilya Segal
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    The paper studies contracting between one principal and N agents in the presence of multilateral externalities. When the principal commits to publicly observed bilateral contracts, inefficiencies arise due to the externalities on agents' reservation utilities. In contrast, when the principal's offers are privately observed, inefficiencies are due to the externalities at efficient outcomes. When the principal can condition her trade with each agent on others' messages, she implements an efficient outcome, while threatening deviators with the harshest possible punishment. However, in the presence of noise that goes to zero more slowly than N goes to infinity, asymptotically agents become nonpivotal, and inefficiency obtains. © 2000 the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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    Article provided by MIT Press in its journal The Quarterly Journal of Economics.

    Volume (Year): 114 (1999)
    Issue (Month): 2 (May)
    Pages: 337-388

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    Handle: RePEc:tpr:qjecon:v:114:y:1999:i:2:p:337-388
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    1. Holmstrom, Bengt & Nalebuff, Barry, 1992. "To the Raider Goes the Surplus? A Reexamination of the Free-Rider Problem," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(1), pages 37-62, Spring.
    2. Morton I. Kamien & Israel Zang, 1988. "The Limits of Monopolization Through Acquisition," Discussion Papers 802, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. 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 210-30, March.
    4. Rasmusen, Eric B & Ramseyer, J Mark & Wiley, John S, Jr, 1991. "Naked Exclusion," American Economic Review, American Economic Association, vol. 81(5), pages 1137-45, December.
    5. Philippe Jehiel & Benny Moldovanu, 1996. "Strategic Nonparticipation," RAND Journal of Economics, The RAND Corporation, vol. 27(1), pages 84-98, Spring.
    6. Harrington, Joseph E, Jr & Prokop, Jacek, 1993. "The Dynamics of the Free-Rider Problem in Takeovers," Review of Financial Studies, Society for Financial Studies, vol. 6(4), pages 851-82.
    7. Mike Burkart & Denis Gromb & Fausto Panunzi, 1998. "Why Higher Takeover Premia Protect Minority Shareholders," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 172-204, February.
    8. Robert Gertner & David Scharfstein, 1991. "A Theory of Workouts and the Effects of Reorganization Law," NBER Technical Working Papers 0103, National Bureau of Economic Research, Inc.
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