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Stable delegation in an unstable environment

Author

Listed:
  • Ferdinando Colombo
  • Guido Merzoni

Abstract

The Kreps—Wilson—Milgrom—Roberts framework is one of the most renowned ways of modelling reputation—building. Once the number of repetitions of the game is considered as a choice variable, such a framework can fruitfully be employed to study the optimal length of a relationship. We analyze a model where a principal delegates to an agent the task of playing with a third party a finitely repeated trust game, characterize the optimal length of the relationship between principal and agent when the principal’s preferences on the agent’s type stochastically change over time and show that stable relationships may optimally obtain (even) in very unstable environments.

Suggested Citation

  • Ferdinando Colombo & Guido Merzoni, 2007. "Stable delegation in an unstable environment," DISEIS - Quaderni del Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo dis0701, Università Cattolica del Sacro Cuore, Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo (DISEIS).
    • Handle: RePEc:dis:wpaper:dis0701
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    File URL: http://dipartimenti.unicatt.it/economia_internazionale_istituzioni_sviluppo_0701.pdf
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    Cited by:

    1. Colombo, Ferdinando & Merzoni, Guido, 2006. "In praise of rigidity: The bright side of long-term contracts in repeated trust games," Journal of Economic Behavior & Organization, Elsevier, vol. 59(3), pages 349-373, March.

    More about this item

    Keywords

    repeated games with incomplete information; reputation; stable relationships; changing environment;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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