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Conditioning Institutions and Renegotiation

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  • Garey Ramey

    (Dept. Economics, UCLA, San Diego)

  • Joel Watson

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

  • Garey Ramey & Joel Watson, 1999. "Conditioning Institutions and Renegotiation," Cowles Foundation Discussion Papers 1225, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:1225
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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d12/d1225.pdf
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    References listed on IDEAS

    as
    1. den Haan, Wouter J. & Ramey, Garey & Watson, Joel, 2003. "Liquidity flows and fragility of business enterprises," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1215-1241, September.
    2. Paul R. Milgrom & Douglass C. North & Barry R. Weingast*, 1990. "The Role Of Institutions In The Revival Of Trade: The Law Merchant, Private Judges, And The Champagne Fairs," Economics and Politics, Wiley Blackwell, vol. 2(1), pages 1-23, March.
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    4. Bergin James & MacLeod W. Bentley, 1993. "Efficiency and Renegotiation in Repeated Games," Journal of Economic Theory, Elsevier, vol. 61(1), pages 42-73, October.
    5. Garey Ramey & Joel Watson, 2002. "Contractual Intermediaries," Journal of Law, Economics, and Organization, Oxford University Press, vol. 18(2), pages 362-384, October.
    6. Ray Debraj, 1994. "Internally Renegotiation-Proof Equilibrium Sets: Limit Behavior with Low Discounting," Games and Economic Behavior, Elsevier, vol. 6(1), pages 162-177, January.
    7. Farrell, Joseph & Maskin, Eric, 1989. "Renegotiation in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 327-360, December.
    8. David G. Pearce, 1991. "Repeated Games: Cooperation and Rationality," Cowles Foundation Discussion Papers 983, Cowles Foundation for Research in Economics, Yale University.
    9. repec:cdl:ucsdec:550851 is not listed on IDEAS
    10. Bendor, Jonathan & Mookherjee, Dilip, 1990. "Norms, Third-Party Sanctions, and Cooperation," Journal of Law, Economics, and Organization, Oxford University Press, vol. 6(1), pages 33-63, Spring.
    11. Blume Andreas, 1994. "Intraplay Communication in Repeated Games," Games and Economic Behavior, Elsevier, vol. 6(2), pages 181-211, March.
    12. Garey Ramey & Joel Watson, 1997. "Contractual Fragility, Job Destruction, and Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 873-911.
    13. Asheim, Geir B., 1991. "Extending renegotiation-proofness to infinite horizon games," Games and Economic Behavior, Elsevier, vol. 3(3), pages 278-294, August.
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    3. Garey Ramey & Joel Watson, 2002. "Contractual Intermediaries," Journal of Law, Economics, and Organization, Oxford University Press, vol. 18(2), pages 362-384, October.

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