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On Randomization in Coalition Contracts


  • Schmitz, Patrick W.


This article analyzes a much debated clause in the 1996 coalition contract between SPD and F.D.P. in Rheinland-Pfalz. Two parties write a contract, based on which decisions under incomplete information have to be made at a later point in time. It is shown that a complex complete contract can achieve the first best outcome. However, a simple incomplete contract can implement the first best outcome only if use of seemingly inefficient randomization is made.

Suggested Citation

  • Schmitz, Patrick W., 1998. "On Randomization in Coalition Contracts," MPRA Paper 13446, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:13446

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    References listed on IDEAS

    1. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-785, July.
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    3. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Bulow, Jeremy & Roberts, John, 1989. "The Simple Economics of Optimal Auctions," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1060-1090, October.
    5. Aghion, P. & Tirole, J., 1993. "On the Management of Innovation," Working papers 93-12, Massachusetts Institute of Technology (MIT), Department of Economics.
    6. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    7. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    8. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
    9. Ewerhart, Christian & Schmitz, Patrick W., 1997. "Ausgewählte Anwendungen der Theorie unvollständiger Verträge," MPRA Paper 6943, University Library of Munich, Germany.
    10. d'Aspremont, Claude & Gerard-Varet, Louis-Andre, 1979. "Incentives and incomplete information," Journal of Public Economics, Elsevier, vol. 11(1), pages 25-45, February.
    11. Werner Güth & Martin Hellwig, 1986. "The private supply of a public good," Journal of Economics, Springer, vol. 5(1), pages 121-159, December.
    12. McAfee, R. Preston, 1991. "Efficient allocation with continuous quantities," Journal of Economic Theory, Elsevier, vol. 53(1), pages 51-74, February.
    13. Huberman, Gur & Kahn, Charles M, 1988. "Limited Contract Enforcement and Strategic Renegotiation," American Economic Review, American Economic Association, vol. 78(3), pages 471-484, June.
    14. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
    15. Hermalin, Benjamin E & Katz, Michael L, 1993. "Judicial Modification of Contracts between Sophisticated Parties: A More Complete View of Incomplete Contracts and Their Breach," Journal of Law, Economics, and Organization, Oxford University Press, vol. 9(2), pages 230-255, October.
    16. Philippe Aghion & Jean Tirole, 1994. "The Management of Innovation," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 1185-1209.
    17. Ewerhart, Christian & Schmitz, Patrick W., 1996. "Die theoretische Fundierung unvollständiger Verträge," MPRA Paper 6947, University Library of Munich, Germany.
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    Cited by:

    1. Schmitz, Patrick W., 2002. "Simple contracts, renegotiation under asymmetric information, and the hold-up problem," European Economic Review, Elsevier, vol. 46(1), pages 169-188, January.
    2. Schmitz, Patrick W., 2002. "On simple contracts, renegotiation under asymmetric information, and the hold-up problem," MPRA Paper 12530, University Library of Munich, Germany.
    3. Schmitz, Patrick W., 2000. "Book Review of “On Voting: a public choice approach” (Tullock, 1998)," MPRA Paper 6972, University Library of Munich, Germany.
    4. Schmitz, Patrick W. & Sliwka, Dirk, 1998. "Die Bedeutung von privater Information für Vertragsbeziehungen zwischen Käufern und Verkäufern," MPRA Paper 6941, University Library of Munich, Germany.

    More about this item


    incomplete contracts; asymmetric information; coalitions; renegotiation;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior


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