Incomplete Contracts and the Commons: Valuing the Strategic Role of Exit Costs

25 Pages Posted: 2 Dec 1999

See all articles by Antonio Nicita

Antonio Nicita

University of Siena - Department of Economics

Date Written: June 1999

Abstract

The paper deals with the question of the governance of common-pool resources when exogenous enforcement is not available. We assert that the recent 'linked games approach' seems to neglect that in order to be effective and to deter agents free-riding and/or hold-up, a linked game has to register a perfect synchronic transfers between agents involved in the 'principal' game. However, in a repeated setting, perfect synchronic transfers may be implemented only at very high costs. As a consequence, hold-up strategies may always occur, beside free-riding behaviours. We suggest, thus, that in order to be effective, a linked game should increase the exit costs of the potential opportunistic agent, in terms of quasi-rents loss. It is thus stressed that in order to prevent ex-post hold-up, the linked game should increase the ex-post specificity of opportunistic agents. Under given conditions, when a linked game increases the specificity degree of the potential opportunist, even in the absence of third party enforcement, agents commitment to cooperate is a self-sustaining equilibrium.

JEL Classification: D23, D62, D74

Suggested Citation

Nicita, Antonio, Incomplete Contracts and the Commons: Valuing the Strategic Role of Exit Costs (June 1999). Available at SSRN: https://ssrn.com/abstract=190008 or http://dx.doi.org/10.2139/ssrn.190008

Antonio Nicita (Contact Author)

University of Siena - Department of Economics ( email )

Piazza S. Francesco, 7
Siena, I-53100
Italy

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