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Contract and Game Theory: Basic Concepts for Settings with Finite Horizons

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  • Joel Watson

    (Department of Economics, University of California, San Diego, 9500 Gilman Drive, La Jolla, CA 92093-0508, USA)

Abstract

This paper examines a general model of contract in multi-period settings with both external and self-enforcement. In the model, players alternately engage in contract negotiation and take individual actions. A notion of contractual equilibrium, which combines a bargaining solution and individual incentive constraints, is proposed and analyzed. The modeling framework helps identify the relation between the manner in which players negotiate and the outcome of the long-term contractual relationship. In particular, the model shows the importance of accounting for the self-enforced component of contract in the negotiation process. Examples and guidance for applications are provided, along with existence results and a result on a monotone relation between “activeness of contracting” and contractual equilibrium values.

Suggested Citation

  • Joel Watson, 2013. "Contract and Game Theory: Basic Concepts for Settings with Finite Horizons," Games, MDPI, vol. 4(3), pages 1-40, August.
    • Handle: RePEc:gam:jgames:v:4:y:2013:i:3:p:457-496:d:28184
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    References listed on IDEAS

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    6. Hua, Xiameng & Watson, Joel, 2022. "Starting small in project choice: A discrete-time setting with a continuum of types," Journal of Economic Theory, Elsevier, vol. 204(C).
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