Contracting with Third Parties (Preliminary)

Abstract

Abstract. We study a standard contracting model with a buyer and a seller who make ex ante investments in their trading relationship. We show that introducing a third party allows implementation of the first-best outcome, even if the agents can renegotiate inefficient outcomes and collude. Fines paid to the third party provide incentives for truth-telling and first-best levels of investment. Collusion with the third party can be ruled out by including “whistle-blowing ” clauses in the contract. 1