Contracting with Externalities and Outside Options

51 Pages Posted: 11 Jun 2004

See all articles by Francis Bloch

Francis Bloch

National Center for Scientific Research (CNRS); University of Angers - Research Group in Quantitative Saving (GREQAM)

Armando R. Gomes

Washington University in St. Louis - John M. Olin Business School; Washington University in Saint Louis - John M. Olin Business School

Date Written: July 8, 2004

Abstract

This paper proposes a model of multilateral contracting where players are engaged in two parallel interactions: they dynamically form coalitions and play a repeated normal form game with temporary and permanent decisions. We show that when outside options are independent of the actions of other players all Markov Perfect equilibrium without co-ordination failures are efficient, regardless of externalities created by interim actions. Otherwise, in the presence of externalities on outside options, all Markov perfect equilibrium may be inefficient. This formulation encompasses many economic models, and we analyse the distribution of coalitional gains and the dynamics of coalition formation in four illustrative applications.

Keywords: Outside options, Externalities, Coalitional bargaining

JEL Classification: C71, C72, C78, D62

Suggested Citation

Bloch, Francis and Bloch, Francis and Gomes, Armando R. and Gomes, Armando R., Contracting with Externalities and Outside Options (July 8, 2004). Available at SSRN: https://ssrn.com/abstract=546627 or http://dx.doi.org/10.2139/ssrn.546627

Francis Bloch

National Center for Scientific Research (CNRS) ( email )

54, boulevard Raspail
Paris, 75006
France

University of Angers - Research Group in Quantitative Saving (GREQAM) ( email )

Centre de la Vieille Charité
2, rue de la Charité
Marseille, 13002
France

Armando R. Gomes (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-4569 (Phone)

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-4569 (Phone)

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