Contracting with Externalities and Outside Options

Francis Bloch and Armando Gomes
Additional contact information
Armando Gomes: Department of Finance, the Wharton School, University of Pennsylvania

No 2004.78, Working Papers from Fondazione Eni Enrico Mattei

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. 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.

Keywords: Outside options; Externalities; Coalitional bargaining (search for similar items in EconPapers)
JEL-codes: C71 C72 C78 D62 (search for similar items in EconPapers)
Date: 2004-05
New Economics Papers: this item is included in nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Contracting with externalities and outside options (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2004.78

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