A model of trust building with anonymous re-matching

Dong Wei

Journal of Economic Behavior & Organization, 2019, vol. 158, issue C, 311-327

Abstract: This paper studies a repeated lender-borrower game with anonymous re-matching (that is, once an ongoing relationship is terminated, players are rematched with new partners and prior histories are unobservable). We propose an equilibrium refinement based on two assumptions: (a) default implies termination of the current relationship; (b) in a given relationship, a better loan-repayment history implies weakly higher continuation values for both parties. This refinement captures the idea of “justifiable punishments” in repeated games. We show that if agents are patient enough and re-matching is sufficiently likely, then the loan size is strictly increasing over time along the equilibrium path of all non-trivial equilibria. As such, this paper helps explain gradualism in long-term relationships, especially credit relationships.

Keywords: Gradualism; Trust building; Moral hazard; Social equilibrium; Credit relationships (search for similar items in EconPapers)
JEL-codes: C72 C73 D86 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:158:y:2019:i:c:p:311-327

DOI: 10.1016/j.jebo.2018.11.025

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