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

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  • Watson, Joel

Abstract

This paper reports the analysis of 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 selfenforced component of contract in the negotiation process. Examples and guidance for applications are provided.

Suggested Citation

  • Watson, Joel, 2006. "Contract and Game Theory: Basic Concepts for Settings with Finite Horizons," University of California at San Diego, Economics Working Paper Series qt0wx67671, Department of Economics, UC San Diego.
  • Handle: RePEc:cdl:ucsdec:qt0wx67671
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    Cited by:

    1. Joel Watson & David A. Miller & Trond E. Olsen, 2020. "Relational Contracting, Negotiation, and External Enforcement," American Economic Review, American Economic Association, vol. 110(7), pages 2153-2197, July.
    2. Heidi Gjertsen & Theodore Groves & David A Miller & Eduard Niesten & Dale Squires & Joel Watson, 2021. "Conservation Agreements: Relational Contracts with Endogenous Monitoring [“Toward a Theory of Discounted Repeated Games with Imperfect Monitoring]," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 37(1), pages 1-40.
    3. Heidi Gjertsen & Theodore Groves & David A. Miller & Eduard Niesten & Dale Squires & Joel Watson, 2014. "A Contract-theoretic Model of Conservation Agreements," World Scientific Book Chapters, in: Kaddour Hadri & William Mikhail (ed.), Econometric Methods and Their Applications in Finance, Macro and Related Fields, chapter 15, pages 425-455, World Scientific Publishing Co. Pte. Ltd..
    4. Mahendra Piraveenan, 2019. "Applications of Game Theory in Project Management: A Structured Review and Analysis," Mathematics, MDPI, vol. 7(9), pages 1-31, September.
    5. David A. Miller & Joel Watson, 2013. "A Theory of Disagreement in Repeated Games With Bargaining," Econometrica, Econometric Society, vol. 81(6), pages 2303-2350, November.
    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).
    7. Joel Watson, 2021. "Theoretical Foundations of Relational Incentive Contracts," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 631-659, August.

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    More about this item

    Keywords

    contract; games; self-enforcement; external enforcement; bargaining protocols; disagreement points; contractual equilibrium; hold up;
    All these keywords.

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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