On the Choice between Such Simple Mechanisms as Individual Ownership and the First-Come First-Serve Rule When Renegotiation is Costly

Abstract

This article compares a set of often used simple contracts or mechanisms in terms of how well they allocate decision rights between two agents over time. A basic assumption is that agents incur a fixed cost each time they renegotiate. The contracts or mechanisms studied are: individual ownership and authority, the first-come first-serve rule, the alternating rule and the sign-up rule. One trade-off that arises is the following: when usage of the asset is flexible in the sense that it does not matter in which period it occurs, agents may rely on obtaining the asset through arriving first at some point, while when an agent needs to time and plan the use of the asset, he or she may wish to hold stronger rights or to use the sign-up rule as a simple form of contracting.

Keywords: Incomplete contracts, individual ownership, first-come first-serve rule, costly renegotiation

JEL Classification: D10, D23, L22