Reconciling Relational Contracting and Hold-up: A Model of Repeated Negotiations.

Goldlücke, Susanne; Kranz, Sebastian

Game-theoretic analysis of relational contracts typically studies Pareto optimal equilibria. We illustrate how this equilibrium selection rules out very intuitive hold-up concerns in stochastic games with long-term decisions. The key problem is that Pareto optimal equilibria, even if satisfying renegotiation-proofness, do not reflect plausible concerns about how today's actions affect future bargaining positions within the relationship. We propose and characterize an alternative equilibrium selection based on the notion that continuation play is repeatedly negotiated in a relationship. We illustrate with several examples how the concept naturally combines relational contracting and hold-up concerns.

PARETO optimum; NEGOTIATION; CONTRACTS; EQUILIBRIUM

Journal of the European Economic Association, 2023, Vol 21, Issue 3, p864

1542-4766

Academic Journal

10.1093/jeea/jvac047