Jan 20, 2016 Filed in: Working papers
With S. Nageeb Ali and David Yilin Yang
Abstract: In a multilateral enforcement regime, a player who cheats on one partner is punished by many partners. But if partners can renegotiate in private, they can subvert the power of the multilateral punishment. We introduce a new notion of "bilateral renegotiation proofness" that applies to multilateral games with private monitoring. For symmetric networked environments, we characterize an optimal bilateral renegotiation proof equilibrium. While players’ ability to renegotiate bilaterally is indeed socially costly, it is perhaps not as costly as one might expect. In densely connected communities, the proportional cost imposed by bilateral renegotiation declines as the number of participants grows, and vanishes in the limit.
Working paper 1/10/2016
(New version coming in June 2016)