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Relational Contracting, Repeated Negotiations, and Hold-Up

  • Kranz, Sebastian

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 Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 80047.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:80047
Contact details of provider: Web page: http://www.socialpolitik.org/
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  23. Pitchford, Rohan & Snyder, Christopher M., 2004. "A solution to the hold-up problem involving gradual investment," Journal of Economic Theory, Elsevier, vol. 114(1), pages 88-103, January.
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