Trading Networks with Bilateral Contracts

Date: 08 February 2016

We consider a model of matching in trading networks in which firms can enter into bilateral contracts. In trading networks, stable outcomes, which are immune to devia- tions of arbitrary sets of firms, may not exist. We define a new solution concept called trail stability. Trail-stable outcomes are immune to consecutive, pairwise deviations between linked firms. We show that any trading network with bilateral contracts has a trail-stable outcome whenever firms’ choice functions satisfy the full substitutabil- ity condition. For trail-stable outcomes, we prove results on the lattice structure, the rural hospitals theorem, strategy-proofness, and comparative statics of firm entry and exit. We also introduce weak trail stability which is implied by trail stability under full substitutability. We describe relationships between the solution concepts.

Alexander Teytelboym Tamás Fleiner Zsuzsanna Jankó Akihisa Tamura

Economics of Sustainability

Trading Networks with Bilateral Contracts


Type: paper

Fleiner, T., Janko, Z., Tamura, A. & Teytelboym, A. (2016). 'Trading Networks with Bilateral Contracts'. R&R Econometrica. Available at http://t8el.com/wp-content/uploads/2015/06/SCN10.pdf


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