Explicit Renegotiation in Repeated Games

Mikhail Safronov and Bruno Strulovici

Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: Cooperative concepts of renegotiation in repeated games have typically assumed that Pareto-ranked equilibria could not coexist within the same renegotiation-proof set. With explicit renegotiation, however, a proposal to move to a Pareto-superior equilibrium can be deterred by a different continuation equilibrium which harms the proposer and rewards the refuser. This paper introduces a simple protocol of renegotiation for repeated games and defines the stability of social norms and renegotiation-proof outcomes in terms of a simple equilibrium refinement. We provide distinct necessary and sufficient conditions for renegotiation-proofness, which converge to each other as renegotiation frictions become negligible. Renegotiation-proof outcomes always exist and can be all included within a single, most permissive social norm that is straightforward to characterize graphically. JEL Classification: C71, C72, C73, C78

Date: 2014-11-14
New Economics Papers: this item is included in nep-gth and nep-mic
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