Error message

Deprecated function: Array and string offset access syntax with curly braces is deprecated in include_once() (line 20 of /mnt/web104/a0/07/510451407/htdocs/includes/file.phar.inc).

Contracting with Externalities and Outside Options

Printer-friendly version
Working paper
Author/s: 
Francis Bloch and Armando Gomes
Issue number: 
2004.078
Publisher: 
FEEM
Year: 
2004
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. This formulation encompasses many economic models with externalities and outside options. We show that when outside options are pure (i.e. independent of the actions of other players), there exists a Markov Perfect equilibrium resulting in efficient outcomes when players become perfectly patient. If outside options are not pure, all Markov perfect equilibria may be inefficient. The distribution of coalitional gains and the dynamics of coalition formation are characterized in four illustrative applications.
Developed by Paolo Gittoi