Multilateral Contracting with Externalities

23 Pages Posted: 12 Aug 2004

See all articles by Armando R. Gomes

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 2004

Abstract

This paper proposes a model for multilateral contracting, where contracts are written and renegotiated over time, and where contracts may impose externalities on other agents. The paper derives several properties of the Markov perfect equilibria of the infinite state-space contracting model. Equilibria always exist and the equilibrium value function is linear and monotonic on the contracts. If the grand coalition is not efficient we show that bargaining delays arise in positive-externality games. Otherwise, if the grand coalition is efficient, there are no bargaining delays and convergence to the grand coalition occurs in a finite number of contracting rounds. Thus, if bargaining frictions are insignificant, the outcome is Pareto efficient. However, if bargaining frictions are not small, we show that inefficiencies arise in negative-externality games because contracting takes place in multiple steps, while in positive-externality games contracting occurs in one step and is Pareto efficient.

Keywords: Coalitional bargaining, contracts, externalities, renegotiation

JEL Classification: C71, C72, C78, D62

Suggested Citation

Gomes, Armando R. and Gomes, Armando R., Multilateral Contracting with Externalities (July 2004). Available at SSRN: https://ssrn.com/abstract=572623 or http://dx.doi.org/10.2139/ssrn.572623

Armando R. Gomes (Contact Author)

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

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

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)

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