Long Term Partnership for Achieving Efficient Capacity Allocation

We consider a capacity provider and a group of independent buyers who partner to share a scarce but expensive-to-build capacity over a finite horizon under privately informed demand conditions. At the beginning of the time horizon, the capacity provider must invest in building capacity; all members may invest in increasing their own and possibly other members' market sizes. Then each member observe and update their private, history-dependent demand information over time. Because the value of the capacity to each member is highly uncertain when investment is made, achieving the first best outcome while sustaining under a dynamic environment is challenging for the partnership. We address this issue by proposing a multi-period membership-type agreement (hereafter referred to as the Agreement) as a series of single-period contracts with flexible terms that are renegotiated each period. The Agreement enforces ex-post efficient capacity allocation and ex-ante efficient investment. The set of inter-partner transfers in the Agreement makes each member the residual claimant to the surplus it creates and hence induces truthful demand reports. This contract is also budget-balanced and voluntary. In doing so, we develop a new solution concept for dynamic collective action mechanisms