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The Formation of Cooperative Relationships


  • Kranton, Rachel E


This article investigates how individuals forge and maintain cooperative relationships when there is always the possibility of starting again with a new partner. The analysis shows that an ever-present opportunity to form new relationships need not destroy cooperation. Simple strategies achieve the (constrained) optimal level of cooperation. These strategies involve a "bond" in the form of reduced utility at the beginning of a relationship. Two newly matched agents may have an incentive to forgo paying this bond, given that everyone else in the population requires payment of a bond to start a new relationship. This incentive disappears, however, if there is enough initial uncertainty about a new partner's valuation of future utility. Accounts from the sociological and anthropological literature indicate that individuals may indeed pay bonds to form cooperative relationships. Copyright 1996 by Oxford University Press.

Suggested Citation

  • Kranton, Rachel E, 1996. "The Formation of Cooperative Relationships," Journal of Law, Economics, and Organization, Oxford University Press, vol. 12(1), pages 214-233, April.
  • Handle: RePEc:oup:jleorg:v:12:y:1996:i:1:p:214-33

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    References listed on IDEAS

    1. Keith Head & John C. Ries & Deborah L. Swenson, 1994. "The Attraction of Foreign Manufacturing Investments: Investment Promotion and Agglomeration Economies," NBER Working Papers 4878, National Bureau of Economic Research, Inc.
    2. David Cutler, 1994. "Market Failure in Small Group Health Insurance," NBER Working Papers 4879, National Bureau of Economic Research, Inc.
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