When do incomplete contracts matter?

22 Pages Posted: 22 Mar 2021

See all articles by Aristotelis Boukouras

Aristotelis Boukouras

University of Leicester

Kostas Koufopoulos

University of York

Xuyuanda Qi

University of Rochester - Simon Business School, Students

Giulio Trigilia

University of Rochester - Simon Business School

Date Written: March 9, 2021

Abstract

This paper derives conditions under which the introduction of a third-party agent solves the renegotiation-proofness problem of Moore and Repullo (1988)-type mechanisms, without introducing the potential for other agents to collude with the third-party. The key novelties of our mechanism are: (i) the introduction of a third-party agent only off-equilibrium and with some probability; (ii) the fact that both its existence and its identity are unknown to the other agents. We show that under these conditions, which are satisfied in many empirical applications, a hidden third-party agent can restore the implementation of the efficient allocation. If this agent does not observe the state of the world, we provide a sufficient condition for implementation to succeed.

Keywords: Implementation, renegotiation-proofness, incomplete contracts, hold- up, contracting with third-parties.

JEL Classification: D86, G19

Suggested Citation

Boukouras, Aristotelis and Koufopoulos, Kostas and Qi, Xuyuanda and Trigilia, Giulio, When do incomplete contracts matter? (March 9, 2021). Available at SSRN: https://ssrn.com/abstract=3800993 or http://dx.doi.org/10.2139/ssrn.3800993

Aristotelis Boukouras

University of Leicester ( email )

University Road
Leicester, LE1 7RH
United Kingdom

Kostas Koufopoulos

University of York ( email )

Heslington
York, YO1 5DD
United Kingdom

Xuyuanda Qi

University of Rochester - Simon Business School, Students ( email )

Rochester, NY
United States

Giulio Trigilia (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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