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Conditioning Institutions and Renegotiation

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  • Garey Ramey

    (Dept. Economics, UCLA, San Diego)

  • Joel Watson

Abstract

We propose a theory of contracting in long-term relationships, emphasizing the role of social institutions in conditioning players' joint selection of Equilibria. Players adopt a social conditioning system in order to place boundaries on their recurrent negotiation and thereby sustain a desirable joint selection of equilibrium. Social conventions have value because players cannot freely reinterpret the labels attached to histories, in contrast to labels that the players might assign internally. We present examples of social conventions that are useful for sustaining cooperative interaction. Our model combines an explicit bargaining technology with a renegotiation concept, coherent equilibrium, that builds on internal consistency. Coherent equilibria exist in general and, for an important class of games, induce unique outcomes.

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File URL: http://cowles.econ.yale.edu/P/cd/d12a/d1225.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1225.

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Length: 39 pages
Date of creation: May 1999
Date of revision:
Handle: RePEc:cwl:cwldpp:1225

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Web page: http://cowles.econ.yale.edu/
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References

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  1. van Damme,Eric, 1986. "Renegotiation-proof equilibria in repeated Prisoner`s dilemma," Discussion Paper Serie A 84, University of Bonn, Germany.
  2. Abrea Dilip & Pearce David & Stacchetti Ennio, 1993. "Renegotiation and Symmetry in Repeated Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 217-240, August.
  3. Ramey, Garey & Watson, Joel, 1999. "Contractual Intermediaries," University of California at San Diego, Economics Working Paper Series qt49p1c23g, Department of Economics, UC San Diego.
  4. David G. Pearce, 1991. "Repeated Games: Cooperation and Rationality," Cowles Foundation Discussion Papers 983, Cowles Foundation for Research in Economics, Yale University.
  5. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June.
  6. Wouter den Haan & Garey Ramey & Joel Watson, 1999. "Liquidity Flows and Fragility of Business Enterprises," NBER Working Papers 7057, National Bureau of Economic Research, Inc.
  7. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  8. Bergin James & MacLeod W. Bentley, 1993. "Efficiency and Renegotiation in Repeated Games," Journal of Economic Theory, Elsevier, vol. 61(1), pages 42-73, October.
  9. Michi Kandori, 2010. "Social Norms and Community Enforcement," Levine's Working Paper Archive 630, David K. Levine.
  10. Asheim, G.B., 1988. "Extending Renegotiation-Proofness To Infinite Horizon Games," Papers 16-88, Norwegian School of Economics and Business Administration-.
  11. Blume Andreas, 1994. "Intraplay Communication in Repeated Games," Games and Economic Behavior, Elsevier, vol. 6(2), pages 181-211, March.
  12. Farrell, Joseph & Maskin, Eric, 1989. "Renegotiation in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 327-360, December.
  13. Ray Debraj, 1994. "Internally Renegotiation-Proof Equilibrium Sets: Limit Behavior with Low Discounting," Games and Economic Behavior, Elsevier, vol. 6(1), pages 162-177, January.
  14. Ramey, Garey & Watson, Joel, 1997. "Contractual Fragility, Job Destruction, and Business Cycles," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 873-911, August.
  15. Matsushina, Hitoshi, 1990. "Long-term partnership in a repeated prisoner's dilemma with random matching," Economics Letters, Elsevier, vol. 34(3), pages 245-248, November.
  16. Greif, Avner & Milgrom, Paul & Weingast, Barry R, 1994. "Coordination, Commitment, and Enforcement: The Case of the Merchant Guild," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 745-76, August.
  17. Bendor, Jonathan & Mookherjee, Dilip, 1990. "Norms, Third-Party Sanctions, and Cooperation," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(1), pages 33-63, Spring.
  18. repec:cdl:ucsdec:550851 is not listed on IDEAS
  19. Dilip Abreu & David Pearce & Ennio Stacchetti, 1989. "Renegotiation and Symmetry in Repeated Games," STICERD - Theoretical Economics Paper Series 198, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  20. Paul R. Milgrom & Douglass C. North & Barry R. Weingast, 1990. "The Role Of Institutions In The Revival Of Trade: The Law Merchant, Private Judges, And The Champagne Fairs," Economics and Politics, Wiley Blackwell, vol. 2(1), pages 1-23, 03.
  21. Douglas Bernheim, B. & Ray, Debraj, 1989. "Collective dynamic consistency in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 295-326, December.
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Citations

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Cited by:
  1. Wernerfelt, Birger, 2003. "Organizational Languages," Working papers 4278-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Garey Ramey & Joel Watson, 2002. "Contractual Intermediaries," Journal of Law, Economics and Organization, Oxford University Press, vol. 18(2), pages 362-384, October.
  3. Biggs, Tyler & Shah, Manju Kedia, 2006. "African SMES, networks, and manufacturing performance," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 3043-3066, November.

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