The Social Equilibrium of Relational Arrangements

Parikshit Ghosh and Debraj Ray

No 336, Working papers from Centre for Development Economics, Delhi School of Economics

Abstract: The enforcement of relational contracts is especially challenging in anonymous environments when there are opportunities to start new partnerships after a transgression. Building on Ghosh and Ray (1996), we study norms within bilateral partnerships that exhibit gradually increasing cooperation, thus serving to deter deviations. However, socially beneficial gradualism may be undermined by partners renegotiating to greater cooperation from the outset. We show that incomplete information regarding partner patience ameliorates this tension even as it adds to the anonymity of the environment. Specifically, gradualism is now bilaterally desirable, and has the social by-product of maintaining individual cooperation. We also study a one-sided version of this problem in which only one of the partners exhibits moral hazard, and offer tentative thoughts on generalizing the theory to environments with richer gradations of incomplete information. JEL Classification: C73, D85, D86. Key Words: relational contracts, social norms, gradualism, trust-building, dynamic games.

Pages: 34 pages
Date: 2023-05
New Economics Papers: this item is included in nep-cta, nep-gth, nep-mic and nep-soc
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Citations: View citations in EconPapers (4)

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Journal Article: The Social Equilibrium of Relational Arrangements (2023)
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