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Moral Hazard and Private Monitoring

  • V. Bhaskar

    (University of Essex)

  • Eric van Damme

    (Center for Economic Research Tilburg)

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.

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Paper provided by EconWPA in its series Game Theory and Information with number 9809004.

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Date of creation: 15 Sep 1998
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Handle: RePEc:wpa:wuwpga:9809004
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  1. Bhaskar, V, 1998. "Informational Constraints and the Overlapping Generations Model: Folk and Anti-Folk Theorems," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 135-49, January.
  2. George J Mailath & Stephen Morris, 2001. "Repeated Games with Almost-Public Monitoring," NajEcon Working Paper Reviews 625018000000000257, www.najecon.org.
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  4. Glen Ellison, 2010. "Cooperation in the Prisoner's Dilemma with Anonymous Random Matching," Levine's Working Paper Archive 631, David K. Levine.
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  7. Drew Fudenberg & David K. Levine & Eric Maskin, 1994. "The Folk Theorem with Imperfect Public Information," Levine's Working Paper Archive 2058, David K. Levine.
  8. Matsushima, Hitoshi, 1991. "On the theory of repeated games with private information : Part II: revelation through communication," Economics Letters, Elsevier, vol. 35(3), pages 257-261, March.
  9. Guth, Werner & Kirchsteiger, Georg & Ritzberger, Klaus, 1998. "Imperfectly Observable Commitments inn-Player Games," Games and Economic Behavior, Elsevier, vol. 23(1), pages 54-74, April.
  10. Rubinstein, Ariel, 1989. "The Electronic Mail Game: Strategic Behavior under "Almost Common Knowledge."," American Economic Review, American Economic Association, vol. 79(3), pages 385-91, June.
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  14. George J. Mailath & Stephen Morris, . ""Repeated Games with Imperfect Private Monitoring: Notes on a Coordination Perspective''," CARESS Working Papres 98-07, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  15. Compte, Olivier, 2002. "On Failing to Cooperate When Monitoring Is Private," Journal of Economic Theory, Elsevier, vol. 102(1), pages 151-188, January.
  16. Green, Edward J. & Porter, Robert H., 1982. "Noncooperative Collusion Under Imperfect Price Information," Working Papers 367, California Institute of Technology, Division of the Humanities and Social Sciences.
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  18. Kandori, Michihiro, 1992. "The Use of Information in Repeated Games with Imperfect Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 581-93, July.
  19. repec:ner:tilbur:urn:nbn:nl:ui:12-154416 is not listed on IDEAS
  20. Dilip Abreu & David Pearce & Ennio Stacchetti, 2010. "Towards a Theory of Discounted Repeated Games with Imperfect Monitoring," Levine's Working Paper Archive 199, David K. Levine.
  21. Olivier Compte, 1998. "Communication in Repeated Games with Imperfect Private Monitoring," Econometrica, Econometric Society, vol. 66(3), pages 597-626, May.
  22. van Damme, E.E.C. & Hurkens, J.P.M., 1994. "Games with imperfectly observable commitment," Discussion Paper 1994-64, Tilburg University, Center for Economic Research.
  23. Michihiro Kandori & Hitoshi Matsushima, 1997. "Private observation and Communication and Collusion," Levine's Working Paper Archive 1256, David K. Levine.
  24. Morris, Stephen & Rob, Rafael & Shin, Hyun Song, 1995. "Dominance and Belief Potential," Econometrica, Econometric Society, vol. 63(1), pages 145-57, January.
  25. Sekiguchi, Tadashi, 1997. "Efficiency in Repeated Prisoner's Dilemma with Private Monitoring," Journal of Economic Theory, Elsevier, vol. 76(2), pages 345-361, October.
  26. Kyle Bagwell, 1992. "Commitment and Observability in Games," Discussion Papers 1014, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  27. Benoit, Jean-Pierre & Krishna, Vijay, 1985. "Finitely Repeated Games," Econometrica, Econometric Society, vol. 53(4), pages 905-22, July.
  28. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  29. Michihiro Kandori & Hitoshi Matsushima, 1998. "Private Observation, Communication and Collusion," Econometrica, Econometric Society, vol. 66(3), pages 627-652, May.
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