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Multilateral Contracting with Externalities

Armando Gomes

Abstract

This paper proposes a model for multilateral contracting, where contracts are written and renegotiated over time, and where contracts may impose externalities on other agents. Equilibria always exist and the equilibrium value function is linear and monotonically increasing on the contracts. If the grand coalition, or contracting among all agents, is inefficient, we show that bargaining delays arise in positive-externality games and equilibrium inefficiency may remain bounded away from zero even as bargaining frictions converge to zero. Otherwise, if the grand coalition is efficient, there are no bargaining delays, convergence to the grand coalition occurs in a finite number of contracting rounds, and the outcome becomes efficient as players become more patient.