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The Social Equilibrium of Relational Arrangements

Author

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  • Parikshit Ghosh
  • Debraj Ray

Abstract

The enforcement of relational contracts is especially challenging for anonymous environments in which new partnerships can be started after a transgression. Building on Ghosh and Ray (1996), we study bilateral partnership norms that exhibit gradually increasing cooperation, thereby deterring deviations. But such gradualism must be incentive-compatible for partners. We argue that incomplete information regarding partner patience solves this problem even though it further exacerbates the overall lack of information. Socially beneficial gradualism now becomes bilaterally desirable. We also study a version of our problem with one-sided moral hazard, and discuss analytical approaches to environments with richer gradations of incomplete information.

Suggested Citation

  • Parikshit Ghosh & Debraj Ray, 2023. "The Social Equilibrium of Relational Arrangements," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 179(3-4), pages 579-615.
    • Handle: RePEc:mhr:jinste:urn:doi:10.1628/jite-2023-0044
    DOI: 10.1628/jite-2023-0044
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    More about this item

    Keywords

    relational contracts; social norms; gradualism; trust-building; dynamic games; relationalcontracts; socialnorms; dynamicgames;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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