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Starting Small and Commitment

Author

Listed:
  • Joel Watson

    (Dept. Economics, UCLA, San Diego)

Abstract

I study a model of a long-term partnership with two-sided incomplete information. The partners jointly determine the stakes of their relationship and individually decide whether to cooperate with or betray each other over time. I characterize the extremal -- interim incentive efficient equilibria. In these equilibria, the partners generally "start small," with the level of interaction growing over time. The types of players separate quickly. Further, cooperation between "good" types is viable regardless of how pessimistic the players are about each other initially. The quick nature of separation in an extremal equilibrium contrasts with the outcome selected by a strong renegotiation criterion (as studied in Watson [11]).

Suggested Citation

  • Joel Watson, 1999. "Starting Small and Commitment," Cowles Foundation Discussion Papers 1217, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1217
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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d12/d1217.pdf
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    References listed on IDEAS

    as
    1. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-1797, November.
    2. Cramton Peter C. & Palfrey Thomas R., 1995. "Ratifiable Mechanisms: Learning from Disagreement," Games and Economic Behavior, Elsevier, vol. 10(2), pages 255-283, August.
    3. Holmstrom, Bengt & Myerson, Roger B, 1983. "Efficient and Durable Decision Rules with Incomplete Information," Econometrica, Econometric Society, vol. 51(6), pages 1799-1819, November.
    4. Rauch, James E. & Watson, Joel, 2003. "Starting small in an unfamiliar environment," International Journal of Industrial Organization, Elsevier, vol. 21(7), pages 1021-1042, September.
    5. Joel Sobel, 1985. "A Theory of Credibility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(4), pages 557-573.
    6. Watson, Joel, 1999. "Starting Small and Renegotiation," Journal of Economic Theory, Elsevier, vol. 85(1), pages 52-90, March.
    7. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
    8. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
    9. Oliver D. Hart & Jean Tirole, 1988. "Contract Renegotiation and Coasian Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(4), pages 509-540.
    10. Crawford, Vincent P, 1985. "Efficient and Durable Decision Rules: A Reformulation," Econometrica, Econometric Society, vol. 53(4), pages 817-835, July.
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    More about this item

    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
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions

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