Self-enforcing cooperation via strategic investment

Moulin, H. , Seth, A. and Taub, B. (2020) Self-enforcing cooperation via strategic investment. Economic Theory Bulletin, 8(1), pp. 1-11. (doi: 10.1007/s40505-019-00163-7)

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We investigate how, in a situation with two players in which noncooperation is the only equilibrium, cooperation can be achieved via costly investment. We find that in the resulting equilibria, cooperation is an all-or-nothing outcome, that is, either there is full cooperation by both players, or no cooperation at all. The cost of investment is unrelated to the degree of cooperation that is ultimately achieved, unless the cost is too high, in which case investment cannot in any degree overcome the disincentive to cooperate. Moreover, the positive externalities that players have on each other in the course of play, although they affect investment, are ultimately irrelevant to the degree of cooperation achieved. We view our model as an explanation for the formation and stable existence of business alliances, where the players are firms forming a partnership defined and sustained by contractual agreements, but which is short of a merger or acquisition.

Item Type:Articles
Additional Information:This research was carried out in part during Bsrt Taub’s stay at ICEF, Higher School of Economics, Moscow. He acknowledges financial support from the Ministry of Education and Science of the Russian Federation, Academic Excellence Project 5-100.
Glasgow Author(s) Enlighten ID:Moulin, Professor Herve and Taub, Professor Bart
Authors: Moulin, H., Seth, A., and Taub, B.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Economic Theory Bulletin
ISSN (Online):2196-1093
Published Online:09 February 2019
Copyright Holders:Copyright © 2019 The Authors
First Published:First published in Economic Theory Bulletin 8(1): 1-11
Publisher Policy:Reproduced under a Creative Commons License

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