Relational Contracting, Repeated Negotiations, and Hold-Up

Sebastian Kranz

No 1888, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: 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. This paper formulates a theory of relational contracting in dynamic games. A crucial feature is that existing relational contracts can depreciate and ensuing negotiations then treat previous informal agreements as bygones. The model nests the traditional formulation of relational contracts as Pareto-optimal equilibria as a special case. In repeated games both formulations are always mathematically equivalent. We provide ample illustrations that in dynamic games the traditional formulation is restrictive in so far that it rules out by assumption many plausible hold-up problems -- even for small discount factors. Our model provides a framework that naturally unifies the analysis of relational contracting and hold-up problems.

Keywords: Relational contracting; Hold-up; Negotiations; Stochastic games (search for similar items in EconPapers)
JEL-codes: C73 C78 D23 L14 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2013-02
New Economics Papers: this item is included in nep-cdm, nep-gth and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cowles.yale.edu/sites/default/files/files/pub/d18/d1888.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Working Paper: Relational Contracting, Repeated Negotiations, and Hold-Up (2013)
Working Paper: Relational Contracting, Repeated Negotiations, and Hold-Up (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cwl:cwldpp:1888

Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.

Access Statistics for this paper

More papers in Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University Yale University, Box 208281, New Haven, CT 06520-8281 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Brittany Ladd ().