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Contracts, Coalitions, and Cooperation

Paper Session

Sunday, Jan. 7, 2018 1:00 PM - 3:00 PM

Pennsylvania Convention Center, 111-A
Hosted By: American Economic Association
  • Chair: George J. Mailath, University of Pennsylvania

From Self-Enforcing Agreements to Self-Sustaining Norms

Bruno Strulovici
,
Northwestern University
Mikhail Safronov
,
University of Cambridge

Abstract

Self-enforcing agreements, such as relational contracts and international agreements, prescribe
actions and rules enforcing these actions, but typically ignore agents’ ability to change
these rules. This paper studies self-sustaining norms, which prescribe how individuals react
to one another’s actions but also to proposals to change the rules. We characterize the set of
self-sustaining norms when agents interact frequently, which has a remarkably simple structure.
Inefficient norms may arise even when all actions are public and frequent and agents can credibly
commit to rules.

Relational Contracting With External Enforcement

David Aaron Miller
,
University of Michigan
Joel Watson
,
University of California-San Diego
Trond Olsen
,
Norwegian School of Economics

Abstract

We study relational contracting in environments with incomplete external enforcement of long-term contracts. The external part of a long term contract governs the game the contracting parties will play in the future if they fail to renegotiate. In a contractual equilibrium, they jointly optimize, while recognizing their relative bargaining power and anticipating their future renegotiations. Our main result is that if the external enforcer can compel transfers, then in a contractual equilibrium the parties always renegotiate to a unique semi-stationary contract, which specifies the same externally-enforced terms in every future period, but special externally-enforced terms for the current period. In a simple principal-agent model with a choice of costly monitoring technology, the optimal semi-stationary contract specifies mild monitoring for the current period, but intense monitoring for future periods. Because the parties renegotiate in each new period, intense monitoring arises only off the equilibrium path after a failed renegotiation.

A Theory of Self-enforcing Coalitions

S. Nageeb Ali
,
Pennsylvania State University
Ce Liu
,
University of California-San Diego

Abstract

A long-standing tradition models legal enforcement as being distinct from community enforcement, whereby individuals follow the law because legal enforcement constrains the actions that players may take or fixes their payoffs from their actions. But this distinction is elusive: after all, laws are enforced by other individuals, who also require incentives to fulfill their role. This paper views the law as being synonymous with a norm: it offers a prescription for behavior today with a shared understanding of the punishments that might follow in the future if the law is violated. Of course, this shared understanding should not ward off only individual deviations but also coalitional deviations insofar as groups may find ways to deviate from the law. Our paper studies what a self-enforcing norm can implement despite the possibility for individual and coalitional deviations. We find that in settings with perfect monitoring, a self-enforcing norm can implement any payoff that is feasible and individually rational so long as players are perfectly patient. This folk theorem coincides with that for sub-game perfect equilibria in repeated games of perfect monitoring, despite the potential for coalitional deviations. However, once coalitions can make secret transfers to each other, a self-enforcing norm cannot implement payoffs beyond the core of the stage-game. Apart from offering a perspective on challenges introduced by the possibility for secret transfers, our paper offers a novel recursive approach to model coalitional reasoning in repeated interactions.

Communication and Cooperation in Markets

S. Nageeb Ali
,
Pennsylvania State University
David Aaron Miller
,
University of Michigan

Abstract

Many markets rely upon third-party punishment to enforce cooperation, and lack an ability to legally punish traders. The inability to use legal enforcement is particularly a concern in electronic markets where instead, ratings and reputations are used to induce sellers from shirking on buyers. We study when buyers have a motive to honestly review sellers. We show that sequential trading---whereby buyers send their payments first, and then sellers decide whether to sell the object---gives buyers an incentive to truthfully rate sellers whereas simultaneous trading---whereby buyers and sellers transfer payments and the object simultaneously---do not give buyers such an incentive. Our results help explain when rating mechanisms succeed.
Discussant(s)
Alexander Wolitzky
,
Massachusetts Institute of Technology
Benjamin Golub
,
Harvard University
Laura Doval
,
California Institute of Technology
Daniel Barron
,
Northwestern University
JEL Classifications
  • C7 - Game Theory and Bargaining Theory
  • D7 - Analysis of Collective Decision-Making