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Relational Contracting, Repeated Negotiations, and Hold-Up

  • Sebastian Kranz

We propose a unified framework to study relational contracting and hold-up problems in infinite horizon stochastic games. We first illustrate that with respect to long run decisions, the common formulation of relational contracts as Pareto-optimal public perfect equilibria is in stark contrast to fundamental assumptions of hold-up models. We develop a model in which relational contracts are repeatedly newly negotiated during relationships. Negotiations take place with positive probability and cause bygones to be bygones. Traditional relational contracting and hold-up formulations are nested as opposite corner cases. Allowing for intermediate cases yields very intuitive results and sheds light on many plausible trade-offs that do not arise in these corner cases. We establish a general existence result and a tractable characterization for stochastic games in which money can be transferred.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 786969000000000676.

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Date of creation: 11 Apr 2013
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Handle: RePEc:cla:levarc:786969000000000676
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