TESTING PASSIVE VERSUS SYMMETRIC BELIEFS IN CONTRACTING WITH EXTERNALITIES

Daiqiang Zhang

International Economic Review, 2021, vol. 62, issue 2, 723-767

Abstract: This article provides identification and estimation methods for a model of contracting with externalities and imperfect information. In this model, one principal offers a contract of trade quantity to each of multiple agents, and the negotiated payment for each agent is determined via Nash bargaining. Beliefs matter due to the privacy of bilateral contracting and the externalities from the dependence of each agent's payoff on all agents' trade quantities. We provide a test to determine whether passive or symmetric beliefs fit a given data set better. The empirical results suggest the relevance of adopting the correct beliefs for policy evaluations.

Date: 2021
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