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Contractual Externalities and Common Agency Equilibria


David Martimort


University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Lars Stole


University of Chicago - Booth School of Business

October 2001

CESifo Working Paper Series No. 581

Abstract:     
This paper characterizes the equilibrium sets of an intrinsic common agency game with direct externalities between principals both under complete and asymmetric information. Direct externalities arise when the contracting variable of one principal affects directly the other principal's payoff. Out-of-equilibrium messages are used by principals to precommit themselves to distort their strategic behavior. We characterize pure-strategy symmetric equilibria arising in such games under complete information and show their multiplicity. We then introduce asymmetric information to refine the set of feasible conjectures. We show that a unique equilibrium may be selected by conveniently perturbing the information structure. Both under complete and asymmetric information, we show that the equilibrium outputs of the intrinsic common agency game are also equilibrium outputs of the delegated common agency game, although the two games differ in terms of the distribution of surplus they involve.

Number of Pages in PDF File: 44

Keywords: Common Agency, Externality, Adverse Selection, Equilibrium Selection

JEL Classification: D82, L51

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Date posted: October 30, 2001  

Suggested Citation

Martimort, David and Stole, Lars, Contractual Externalities and Common Agency Equilibria (October 2001). CESifo Working Paper Series No. 581. Available at SSRN: http://ssrn.com/abstract=287681

Contact Information

David Martimort
University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )
Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 5 6112 8614 (Phone)
+33 5 6112 8637 (Fax)
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Lars A. Stole (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7309 (Phone)
773-702-0458 (Fax)
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