Incomplete Contracts and the Commons: Valuing the Strategic Role of Exit Costs
25 Pages Posted: 2 Dec 1999
Date Written: June 1999
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: Suggested Citation