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Title: Reconciliating Relational Contracting and Hold-up: A Model of Repeated Negotiations

Author(s): Susanne Goldl�cke and Sebastian Kranz

Publication Date: December 2017

Keyword(s): hold-up, negotiations, relational contracting and Stochastic Games

Programme Area(s): Industrial Organization

Abstract: We propose a unified framework to study relational contracting and hold-up problems in infinite horizon stochastic games with monetary transfers. Starting from the observation that the common formulation of relational contracts as Pareto-optimal public perfect equilibria is in stark contrast to fundamental assumptions of hold-up models, we develop a model in which relational contracts are repeatedly negotiated in a relationship. New negotiations take place with positive probability each period and treat previous informal agreements as bygones. The concept nests relational contracting and hold-up models as opposite corner cases. Allowing for intermediate cases sheds light on many plausible trade-offs that do not arise in these corner cases.

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Bibliographic Reference

Goldl�cke, S and Kranz, S. 2017. 'Reconciliating Relational Contracting and Hold-up: A Model of Repeated Negotiations'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12540