N - player costly contracting

We present a model of N-player contracting with transaction costs and endogenous property rights. Ex ante agreed surplus sharing can be altered ex post, after irreversible investments in production (characterised by the generalised Cobb-Douglas production function). The actual surplus sharing is determined ex post, after each player has chosen a costly action to alter the surplus sharing in his favour, thus incurring transaction costs. We demonstrate that when one player chooses the ex ante contract, each player’s equilibrium share increases in his productivity and transaction cost parameters. We contrast our model with property rights theory (PRT) where ex ante contracts are not enforceable ex post.