Oct 22, 2015 Filed in: Working papers
With S. Nageeb Ali and Yilin David 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. We show that while players’ ability to renegotiate bilaterally is socially costly, it is perhaps not as costly as one might expect. We study a single seller interacting with many buyers, as well as communities in which everyone interacts with everyone else. In both cases, as the number of participants grows, the proportional cost imposed by bilateral renegotiation declines, and vanishes in the limit.
Working paper 10/22/2015