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Conditioning Institutions and Renegotiation

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  • Ramey, Garey
  • Watson, Joel

Abstract

We propose a theory of contracting in long-term relationships, emphasizing the role of social institutions in conditioning players' joint selection of equilibria. Players adopt a social conditioning system in order to place boundaries on their recurrent negotiation and thereby sustain a desirable joint selection of equilibrium. Social conventions have value because players cannot freely reinterpret the labels attached to histories, in contrast to labels that the players might assign internally. We present examples of social conventions that are useful for sustaining cooperative interaction. Our model combines an explicit bargaining technology with a renegotiation concept, coherent equilibrium, that builds on internal consistency. Coherent equilibria exist in general and, for an important class of games, induce unique outcomes.

Suggested Citation

  • Ramey, Garey & Watson, Joel, 2000. "Conditioning Institutions and Renegotiation," University of California at San Diego, Economics Working Paper Series qt5zd216tw, Department of Economics, UC San Diego.
    • Handle: RePEc:cdl:ucsdec:qt5zd216tw
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    Cited by:

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    2. Birger Wernerfelt, 2004. "Organizational Languages," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(3), pages 461-472, September.
    3. Garey Ramey & Joel Watson, 2002. "Contractual Intermediaries," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 18(2), pages 362-384, October.
    4. Biggs, Tyler & Shah, Manju Kedia, 2006. "African SMES, networks, and manufacturing performance," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 3043-3066, November.

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