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A model of trust building with anonymous re-matching

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  • Wei, Dong

Abstract

This paper studies a repeated lender-borrower game with anonymous re-matching (that is, once an ongoing relationship is terminated, players are rematched with new partners and prior histories are unobservable). We propose an equilibrium refinement based on two assumptions: (a) default implies termination of the current relationship; (b) in a given relationship, a better loan-repayment history implies weakly higher continuation values for both parties. This refinement captures the idea of “justifiable punishments” in repeated games. We show that if agents are patient enough and re-matching is sufficiently likely, then the loan size is strictly increasing over time along the equilibrium path of all non-trivial equilibria. As such, this paper helps explain gradualism in long-term relationships, especially credit relationships.

Suggested Citation

  • Wei, Dong, 2019. "A model of trust building with anonymous re-matching," Journal of Economic Behavior & Organization, Elsevier, vol. 158(C), pages 311-327.
    • Handle: RePEc:eee:jeborg:v:158:y:2019:i:c:p:311-327
    DOI: 10.1016/j.jebo.2018.11.025
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    References listed on IDEAS

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    Cited by:

    1. Parikshit Ghosh & Debraj Ray, 2023. "The Social Equilibrium of Relational Arrangements," Working papers 336, Centre for Development Economics, Delhi School of Economics.

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    More about this item

    Keywords

    Gradualism; Trust building; Moral hazard; Social equilibrium; Credit relationships;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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