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Performance and Turnover in a Stochastic Partnership

  • David McAdams

Suppose that players in a stochastic partnership have the option to quit and rematch anonymously. If stage-game payoffs are subject to a persistent initial shock, the (unique) social welfare-maximizing equilibrium induces a "dating" process in which all partners enjoy the full potential equilibrium gains from each match. By contrast, maximizing social welfare in non-stochastic repeated games with rematching requires that players burn money or otherwise fail to realize all potential equilibrium gains. Comparative statics on welfare and turnover are also provided, consistent with documented patterns of "survivorship bias" and "honeymoon." (JEL C72, C73, C78)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mic.3.4.107
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Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

Volume (Year): 3 (2011)
Issue (Month): 4 (November)
Pages: 107-42

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Handle: RePEc:aea:aejmic:v:3:y:2011:i:4:p:107-42
Note: DOI: 10.1257/mic.3.4.107
Contact details of provider: Web page: https://www.aeaweb.org/aej-micro
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