Starting Small and Commitment |
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| Institution: | 1. Warwick Business School, University of Warwick, Coventry CV4 7AL, United Kingdom;2. Department of Business Administration, University of Zurich, Plattenstrasse 14, 8032 Zurich, Switzerland;1. Department of Respiratory Medicine, Japan Community Health Care Organization Kyushu Hospital, Fukuoka, Japan;2. Department of Cardiovascular Medicine, Japan Community Health Care Organization Kyushu Hospital, Fukuoka, Japan;1. Faculty of Business and Economics (HEC), University of Lausanne, Internef 538, CH-1015 Lausanne, Switzerland;2. School of Economics, University of Sydney, NSW 2006, Australia;1. Cardiology Unit, Madre Giuseppina Vannini Hospital, Rome, Italy;2. Radiology Unit, Madre Giuseppina Vannini Hospital, Rome, Italy;1. School of Economics, University of Sydney, Australia;2. Department of Economics, Monash University, Australia |
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| Abstract: | I study a model of a long-term partnership with two-sided incomplete information. The partners jointly determine the stakes of their relationship and individually decide whether to cooperate with or betray each other over time. I characterize the extremal—interim incentive efficient—equilibria. In these equilibria, the partners generally “start small,” and the level of interaction grows over time. The types of players separate quickly. Further, cooperation between “good” types is viable regardless of how pessimistic the players are about each other initially. The quick nature of separation in an extremal equilibrium contrasts with the outcome selected by a strong renegotiation criterion (as studied in Watson (1999, J. Econ. Theory85, 52–90). Journal of Economic Literature Classification Numbers: C72, C73, D74. |
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