On Governing Multilateral Transactions with Bilateral Contracts

Abstract

Bilateral contracts, while neither negotiated nor enforced in an integrated way, are nevertheless often interrelated both economically and strategically owing to production or consumption complementarities and to asymmetric information. A set of bilateral contracts forms a mechanism with special properties. This mechanism forms a contract equilibrium if there is no joint incentive for a supplier and any individual customer unilaterally to alter the terms of their contract. If agents' preferences are risk neutral in money income, and if their private information is independent, then there exists a contract equilibrium that implements efficient transactions. If, in addition, preferences are strictly concave and differentiable in goods and services, and technologically feasible sets are suitably convex, then this equilibrium is essentially unique.