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A note on budget constraints and outside options in common agency

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  • Chiu Yu Ko

    (National University of Singapore)

Abstract

Bernheim and Whinston (Q J Econ 101:1–31, 1986) show that, in a common agency problem without budget constraints, the set of Nash equilibria with truthful strategies (TNE), the set of coalition-proof Nash equilibria (CPNE), and the principal-optimal core of the underlying coalitional game are non-empty and all equivalent in payoff space. We show that, with budget constraints, none of Bernheim and Whinston’s (Q J Econ 101:1–31, 1986) results hold: (i) a CPNE may not exist, (ii) a TNE may not exist even when a CPNE exists, (iii) a TNE may not be a CPNE, and (iv) both TNE and CPNE payoffs are core allocations but are not necessarily principal-optimal. However, when principals have outside options but no budget constraints, (i), and (iii) continue to hold but not for (ii) and (iv). In particular, a TNE always exists but the core may be empty.

Suggested Citation

  • Chiu Yu Ko, 2017. "A note on budget constraints and outside options in common agency," Theory and Decision, Springer, vol. 83(1), pages 95-106, June.
    • Handle: RePEc:kap:theord:v:83:y:2017:i:1:d:10.1007_s11238-017-9587-y
    DOI: 10.1007/s11238-017-9587-y
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    References listed on IDEAS

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    Cited by:

    1. Ilias Boultzis, 2020. "Truthful Equilibria in Generalized Common Agency Models," Papers 2007.15942, arXiv.org.

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    More about this item

    Keywords

    Common agency; Budget constraint; Outside option; Coalition-proof Nash equilibrium; Truthful Nash equilibrium; Subgame perfection;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D79 - Microeconomics - - Analysis of Collective Decision-Making - - - Other

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