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Trading favors: optimal exchange and forgiveness

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Author Info

  • Hugo A. Hopenhayn
  • Christine Hauser

Abstract

This paper characterizes optimal renegotiation proof public perfect equilibrium in a repeated partnership game. The model was originally introduced by Mobius. Players have random arrival of endowments which are privately observed that are more valued by the partner than the player receiving the endowment. Optimal cooperation requires agents to give the endowments received to the partners. An algorithm is provided to find the best public perfect equilibrium. In this equiibrium, the relative price of current for future favors (endowment transfers) varies sistematically with the history of favors received. Forgivness is also a property of the equilibrium: after periods of no favors from both parties, utilities tend to converge

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 125.

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Date of creation: 2004
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Handle: RePEc:red:sed004:125

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Related research

Keywords: Dynamic contracts; Repeated games; Incomplete information;

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Cited by:
  1. Yared, Pierre, 2010. "A dynamic theory of war and peace," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1921-1950, September.
  2. Bowen, T. Renee & Kreps, David M. & Skrzypacz, Andrzej, 2012. "Rules with Discretion and Local Information," Research Papers 2117, Stanford University, Graduate School of Business.

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