Starting Small and Commitment
I study a model of a long-term partnership with two-sided incomplete information. The partners jointly determine the stakes of their relationahip and individually decide whether to cooperate with or betray each other over time. I characterize the extremal -- interim incentive efficient -- equilibria. In these equilibria, the partners generally "start small," with the level of interaction growing over time. The types of players separate quickly. Further, cooperation between "good" types is viable regardless of how pessimistic the players are about each other initially. The quick nature of separation in an extremal equilibrium contrasts with the outcome selected by a strong renegotiation criterion (as studied in Watson (1999)).
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- James E. Rauch & Joel Watson, 1999.
"Starting Small in an Unfamiliar Environment,"
NBER Working Papers
7053, National Bureau of Economic Research, Inc.
- Holmstrom, Bengt & Myerson, Roger B, 1983.
"Efficient and Durable Decision Rules with Incomplete Information,"
Econometric Society, vol. 51(6), pages 1799-819, November.
- Bengt Holmstrom & Roger B. Myerson, 1981. "Efficient and Durable Decision Rules with Incomplete Information," Discussion Papers 495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Crawford, Vincent P, 1985. "Efficient and Durable Decision Rules: A Reformulation," Econometrica, Econometric Society, vol. 53(4), pages 817-35, July.
- Joel Sobel, 1985. "A Theory of Credibility," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 557-573.
- Oliver D. Hart & Jean Tirole, 1988. "Contract Renegotiation and Coasian Dynamics," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 509-540.
- Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
- Watson, Joel, 1999. "Starting Small and Renegotiation," Journal of Economic Theory, Elsevier, vol. 85(1), pages 52-90, March.
- Roger B. Myerson, 1981.
"Mechanism Design by an Informed Principal,"
481, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Cramton, Peter C. & Palfrey, Thomas R., 1990.
"Ratifiable Mechanisms: Learning from Disagreement,"
731, California Institute of Technology, Division of the Humanities and Social Sciences.
- Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
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