Endogenous Games and Mechanisms: Side Payments Among Players

We characterize the outcomes of games when players may make binding offers of strategy contingent side payments before the game is played. This does not always lead to efficient outcomes, despite complete information and costless contracting. The characterizations are illustrated in a series of examples, including voluntary contribution public good games, Cournot and Bertrand oligopoly, principal-agent problems, and commons games, among others. ∗Division of Humanities and Social Sciences, 22877, California Institute of Technology, Pasadena, California 91125, USA, [email protected] and [email protected]. We thank Ken Hendricks, Philippe Jéhiel, Ehud Kalai, Roger Lagunoff, Bentley MacLeod, Nolan Miller, Hakan Orbay, Mike Peters, and seminar participants at the University of Arizona, Caltech, University of Texas, University of Toronto, U.B.C., USC, and the Decentralization Conference for helpful comments and suggestions. Financial support under NSF grants SES-9986190 and SES-9986676 is gratefully acknowledged.