Contracts and externalities: How things fall apart

Garance Genicot, Debraj Ray

    Research output: Contribution to journalArticle

    Abstract

    A single principal interacts with several agents, offering them contracts. The crucial assumption of this paper is that the outside-option payoffs of the agents depend positively on how many uncontracted or "free" agents there are. We study how such a principal, unwelcome though he may be, approaches the problem of contract provision to agents when coordination failure among the latter group is explicitly ruled out. Two variants are considered. When the principal cannot re-approach agents, there is a unique equilibrium, in which contract provision is split up into two phases. In phase 1, simultaneous offers at good (though varying) terms are made to a number of agents. In phase 2, offers must be made sequentially, and their values are "discontinuously" lower: they are close to the very lowest of all the outside options. When the principal can repeatedly approach the same agent, there is a multiplicity of equilibria. In some of these, the agents have the power to force delay. They can hold off the principal's overtures temporarily, but they must succumb in finite time. In both models, despite being able to coordinate their actions, agents cannot resist an "invasion" by the principal and hold to their best payoff. It is in this sense that "things [eventually] fall apart".

    Original languageEnglish (US)
    Pages (from-to)71-100
    Number of pages30
    JournalJournal of Economic Theory
    Volume131
    Issue number1
    DOIs
    StatePublished - Nov 2006

    Keywords

    • Bilateral contracting
    • Coordination game
    • Delays
    • Exploitation
    • Multilateral externalities

    ASJC Scopus subject areas

    • Economics and Econometrics

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