Question
Writing the Terms to an Externally Enforced Contract. Suppose that the firms can write their own contracts and specify the transfers each would have to
Writing the Terms to an Externally Enforced Contract. Suppose that the firms can write their own contracts and specify the transfers each would have to make to the other in the event one does not invest in the relationship. Further suppose that the terms of these contracts can be externally enforced by a court that is able to exactly verify the outcomes of production. Under these circumstances and given the technology of the interaction as depicted in the matrices below, how would the firms write the terms of the contract to support (I, I)? More specifically:
Firm B: Invest (I) | Not Invest (N) | |
Firm A: Invest (I) | (60,48) | (-30, 93) |
Not Invest (N) | (70,-10) | (0,0) |
(2.a) Minimum amount from A to B (the amount that A must be at least willing to give up in order to convince Firm B that A would not be willing to cheat):
(2.b) Minimum amount from B to A (the amount that B must be at least willing to given up in order to convince Firm A that B would not be willing to break the terms of the contract):
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