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Trading favors: optimal exchange and forgiveness


  • Hugo A. Hopenhayn
  • Christine Hauser


This paper characterizes optimal renegotiation proof public perfect equilibrium in a repeated partnership game. The model was originally introduced by Mobius. Players have random arrival of endowments which are privately observed that are more valued by the partner than the player receiving the endowment. Optimal cooperation requires agents to give the endowments received to the partners. An algorithm is provided to find the best public perfect equilibrium. In this equiibrium, the relative price of current for future favors (endowment transfers) varies sistematically with the history of favors received. Forgivness is also a property of the equilibrium: after periods of no favors from both parties, utilities tend to converge

Suggested Citation

  • Hugo A. Hopenhayn & Christine Hauser, 2004. "Trading favors: optimal exchange and forgiveness," 2004 Meeting Papers 125, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:125

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    References listed on IDEAS

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    Cited by:

    1. Pierre Yared, 2008. "The Use of Concessions in Forestalling War," 2008 Meeting Papers 32, Society for Economic Dynamics.
    2. T. Renee Bowen & David M. Kreps & Andrzej Skrzypacz, 2013. "Rules with Discretion and Local Information," The Quarterly Journal of Economics, Oxford University Press, vol. 128(3), pages 1273-1320.
    3. Yared, Pierre, 2010. "A dynamic theory of war and peace," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1921-1950, September.

    More about this item


    Dynamic contracts; Repeated games; Incomplete information;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design


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