DP12540 Reconciliating Relational Contracting and Hold-up: A Model of Repeated Negotiations

Author(s): Susanne Goldl├╝cke, Sebastian Kranz
Publication Date: December 2017
Keyword(s): hold-up, negotiations, relational contracting, Stochastic Games
JEL(s): C73, C78, D23, L14
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12540

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.