Competition and Incentives with Nonexclusive Contracts

Abstract

We consider a common agency context where socially desired exclusive dealing clauses cannot be enforced. Customers sequentially negotiate nonexclusive credit or insurance contracts from multiple risk-neutral firms in a market with free entry. Each contract is subject to moral hazard arising from a common noncontractible effort decision. Outcomes of a class of Markov equilibria are characterized by a corresponding notion of constrained efficiency. These may involve more rationing than in a context of exclusive contracts. Increases in public provision or competition can result in increased prices on the private market, owing to an induced reduction in customer effort.

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