Common Agency with Budget Constraints

Abstract

Bernheim and Whinston (1986) show that, in a common agency problem without budget constraints, the set of Nash equilibria with truthful strategies (TNE), the set of coalition-proof Nash equilibria (CPNE), and the principal-optimal core of the underlying coalitional game exist and are all equivalent in payoff space. We show that, with budget constraints, none of Bernheim and Whinston's (1986) results hold: (i) a CPNE may not exist, (ii) a TNE may not exist even when a CPNE exists, (iii) a TNE may not be a CPNE, and (iv) both TNE and CPNE payoffs are core allocations but are not necessarily principal-optimal.

Keywords: common agency, budget constraint, coalition-proof Nash equilibrium, truthful Nash equilibrium, subgame perfection

JEL Classification: C72, D79