Bargaining Power in Multilateral Relational Contracts: a Setting Particularly Amenable to the Analysis of Contractual Equilibrium

Abstract

This paper examines multilateral relational contracting and renegotiation using the concept of contractual equilibrium (Miller and Watson 2013), which incorporates a full account of bargaining and the exercise of bargaining power in each discrete period of interaction. Although contractual equilibrium has a straightforward characterization in general, and is particularly uncomplicated to solve in two-player settings, analysis can be more challenging in settings with more than two players. It is shown here that including a phase of voluntary transfers at the end of each period, in addition to at the beginning where bargaining occurs, creates an environment in which the analysis of enforceable productive action profiles is simplified. The solution algorithm is illustrated for an example of international climate agreements, where the equilibrium level of cooperation depends on relative bargaining weights and emissions technologies.