Conditioning Institutions and Renegotiation

Garey Ramey and Joel Watson

No 1225, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We propose a theory of contracting in long-term relationships, emphasizing the role of social institutions in conditioning players' joint selection of Equilibria. Players adopt a social conditioning system in order to place boundaries on their recurrent negotiation and thereby sustain a desirable joint selection of equilibrium. Social conventions have value because players cannot freely reinterpret the labels attached to histories, in contrast to labels that the players might assign internally. We present examples of social conventions that are useful for sustaining cooperative interaction. Our model combines an explicit bargaining technology with a renegotiation concept, coherent equilibrium, that builds on internal consistency. Coherent equilibria exist in general and, for an important class of games, induce unique outcomes.

Pages: 39 pages
Date: 1999-05
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Citations: View citations in EconPapers (3)

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