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

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  • Susanne Goldlücke
  • Sebastian Kranz

Abstract

Game-theoretic analysis of relational contracts typically studies Pareto optimal equilibria. We illustrate how this equilibrium selection rules out very intuitive hold-up concerns in stochastic games with long-term decisions. The key problem is that Pareto optimal equilibria, even if satisfying renegotiation-proofness, do not reflect plausible concerns about how today’s actions affect future bargaining positions within the relationship. We propose and characterize an alternative equilibrium selection based on the notion that continuation play is repeatedly negotiated in a relationship. We illustrate with several examples how the concept naturally combines relational contracting and hold-up concerns.

Suggested Citation

  • Susanne Goldlücke & Sebastian Kranz, 2023. "Reconciling Relational Contracting and Hold-up: A Model of Repeated Negotiations," Journal of the European Economic Association, European Economic Association, vol. 21(3), pages 864-906.
    • Handle: RePEc:oup:jeurec:v:21:y:2023:i:3:p:864-906.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvac047
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