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Moral hazard and private monitoring

Author

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  • van Damme, E.E.C.

    (Tilburg University, Center For Economic Research)

  • Bhaskar, V.

Abstract

We analyze a model of repeated bilateral trade with moral hazard, where the quality of goods received can differ from the quality despatched due to deterioration during transportation. Since the sender does not observe the quality of good received and the receiver does not observe the quality despatched, we have a repeated game with with imperfect monitoring by private signals. The stage game has multiple Nash equilibria, which would allow cooperation in finitely repeated interaction. However, with private signals, the pure strategy equilibria of the twice-repeated game are degenerate, and cannot support any cooperation.We construct a mixed strategy equilibrium which supports partial cooperation. However this mixed strategy equilibrium cannot approximate the cooperative outcome even if the noise in the signals tends to zero. This failure of lower hemicontinuity in the sequential equilibrium correspondence is removed if we allow for extensive form correlation; i.e. we allow players to condition their second period actions upon a sunspot as well as the private signals. We use these ideas to show how efficient outcomes can be supported in infinitely repeated one-sided moral hazard.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • van Damme, E.E.C. & Bhaskar, V., 1997. "Moral hazard and private monitoring," Discussion Paper 1997-98, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:fcc97407-becb-465c-9856-e74446f2dfdd
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    References listed on IDEAS

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    Cited by:

    1. Mailath, George J. & Morris, Stephen, 2002. "Repeated Games with Almost-Public Monitoring," Journal of Economic Theory, Elsevier, vol. 102(1), pages 189-228, January.
    2. Kandori, Michihiro, 2002. "Introduction to Repeated Games with Private Monitoring," Journal of Economic Theory, Elsevier, vol. 102(1), pages 1-15, January.
    3. V. Bhaskar & George J. Mailath & Stephen Morris, 2008. "Purification in the Infinitely-Repeated Prisoners' Dilemma," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 515-528, July.
    4. George J. Mailath & Larry Samuelson, "undated". ""Your Reputation Is Who You're Not, Not Who You'd Like To Be''," CARESS Working Papres 98-11, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
    5. V. Bhaskar & George J. Mailath & Stephen Morris, 2006. "Purification in the Infinitely-Repeated Prisoners’ Dilemma, Second Version," PIER Working Paper Archive 07-024, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 20 Aug 2007.
    6. Yamamoto, Yuichi, 2009. "A limit characterization of belief-free equilibrium payoffs in repeated games," Journal of Economic Theory, Elsevier, vol. 144(2), pages 802-824, March.
    7. Chan, Jimmy H. & Zhang, Wenzhang, 2016. "Approximate efficiency in repeated games with side-payments and correlated signals," Theoretical Economics, Econometric Society, vol. 11(1), January.
    8. Heidhues, Paul & Lagerlof, Johan, 2003. "Hiding information in electoral competition," Games and Economic Behavior, Elsevier, vol. 42(1), pages 48-74, January.
    9. Mailath, George J. & Morris, Stephen, 2006. "Coordination failure in repeated games with almost-public monitoring," Theoretical Economics, Econometric Society, vol. 1(3), pages 311-340, September.
    10. Bhaskar, V. & Obara, Ichiro, 2002. "Belief-Based Equilibria in the Repeated Prisoners' Dilemma with Private Monitoring," Journal of Economic Theory, Elsevier, vol. 102(1), pages 40-69, January.
    11. Bergemann, Dirk & Valimaki, Juuso, 2002. "Strategic Buyers and Privately Observed Prices," Journal of Economic Theory, Elsevier, vol. 105(2), pages 469-482, August.
    12. V. Bhaskar & George J. Mailath & Stephen Morris, 2004. "Purification in the Infinitely-Repeated Prisoners’ Dilemma," PIER Working Paper Archive 04-004, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    13. Aoyagi, Masaki, 2002. "Collusion in Dynamic Bertrand Oligopoly with Correlated Private Signals and Communication," Journal of Economic Theory, Elsevier, vol. 102(1), pages 229-248, January.
    14. V. Bhaskar & George J. Mailath & Stephen Morris, 2008. "Purification in the Infinitely-Repeated Prisoners' Dilemma," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 515-528, July.
    15. Lagerlof, Johan, 2003. "Policy-Motivated Candidates, Noisy Platforms, and Non-robustness," Public Choice, Springer, vol. 114(3-4), pages 319-347, March.
    16. Compte, Olivier, 2002. "On Failing to Cooperate When Monitoring Is Private," Journal of Economic Theory, Elsevier, vol. 102(1), pages 151-188, January.
    17. Compte, Olivier, 2002. "On Sustaining Cooperation without Public Observations," Journal of Economic Theory, Elsevier, vol. 102(1), pages 106-150, January.
    18. William Fuchs, 2007. "Contracting with Repeated Moral Hazard and Private Evaluations," American Economic Review, American Economic Association, vol. 97(4), pages 1432-1448, September.
    19. Jeffrey C. Ely, 2000. "Correlated Equilibrium and Private Monitoring," Discussion Papers 1265, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    20. Michihiro Kandori & Hitoshi Matsushima, 1997. "Private observation and Communication and Collusion," Levine's Working Paper Archive 1256, David K. Levine.
    21. Michihiro Kandori, 2011. "Weakly Belief‐Free Equilibria in Repeated Games With Private Monitoring," Econometrica, Econometric Society, vol. 79(3), pages 877-892, May.
    22. Hino, Yoshifumi, 2018. "A folk theorem in infinitely repeated prisoner's dilemma with small observation cost," MPRA Paper 96010, University Library of Munich, Germany, revised 13 Sep 2019.
    23. Bhaskar, V., 2009. "Commitment and observability in a contracting environment," Games and Economic Behavior, Elsevier, vol. 66(2), pages 708-720, July.

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    More about this item

    Keywords

    game theory; moral hazard; information;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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