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Trilateral Contract and the Hold-up Problem

  • Regine Oexl

    ()

    (Università di Padova)

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    We present a novel solution for the hold up problem, when more than two parties are involved. The case we consider is a company selling identical products to two buyers that have a common interest in inducing the seller to make a quality enhancing investment. We show that a trilateral contract may provide the correct incentives to restore optimal efficiency. The contract induces a coalition proof Nash equilibrium and holds under complete as well as incomplete information. The extension to more than two buyers is straightforward.

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    File URL: http://economia.unipd.it/sites/decon.unipd.it/files/20100126.pdf
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    Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0126.

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    Length: 17 pages
    Date of creation: Jan 2011
    Date of revision:
    Handle: RePEc:pad:wpaper:0126
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    1. Michi Kandori, 2010. "Social Norms and Community Enforcement," Levine's Working Paper Archive 630, David K. Levine.
    2. Laffont, J.J. & Martimort, D., 1996. "Collusion Under Asymmetric Information," Papers 95.389, Toulouse - GREMAQ.
    3. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
    4. Avinash Dixit, 2003. "On Modes of Economic Governance," Econometrica, Econometric Society, vol. 71(2), pages 449-481, March.
    5. Radner, Roy, 1981. "Monitoring Cooperative Agreements in a Repeated Principal-Agent Relationship," Econometrica, Econometric Society, vol. 49(5), pages 1127-48, September.
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