Jul 01, 2010 Filed in:
Working papersWith Joel Watson
Abstract: This paper develops the concept of contractual equilibrium for repeated games with transferable utility, whereby the players negotiate cooperatively over their continuation strategies at the start of each period. Players may disagree in the negotiation phase, and continuation play may be suboptimal under disagreement. Under agreement, play is jointly optimal in the continuation game, and the players split the surplus (according to fixed bargaining weights) relative to what they would have attained under disagreement. Contractual equilibrium outcomes also arise from subgame perfect equilibria in a class of models with noncooperative bargaining, under some assumptions on the endogenous meaning of cheap-talk messages. Contractual equilibria exist for all discount factors, and for any given discount factor all contractual equilibria attain the same aggregate utility. Patient players attain efficiency under simple sufficient conditions; necessary and sufficient conditions are also provided. The allocation of bargaining power can dramatically affect aggregate utility. The theory extends naturally to games with more than two players, imperfect public monitoring, and heterogeneous discount factors.
Working paper 6/30/2010
PermalinkTags: Repeated games, Bargaining, Negotiation, Renegotiation proofness, Cooperation
