Contracting with Third Parties, American Economic Journal: Microeconomics
In the bilateral hold-up model and the moral hazard in teams model, 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. Our results suggest that models that provide foundations for hold-up and incomplete contracts by invoking renegotiation are sensitive to the introduction of third parties.
Sandeep Baliga, Tomas Sjostrom
Baliga, Sandeep, and Tomas Sjostrom. 2009. Contracting with Third Parties. American Economic Journal: Microeconomics. 1(1): 75-100.