Is multilateral enforcement vulnerable to bilateral renegotiation?

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. 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

Enforcing cooperation in networked societies

With S. Nageeb Ali

Abstract: Which social norms and networks maximize cooperation in bilateral relationships? We study a network of players in which each link is a repeated bilateral partnership with two-sided moral hazard. The obstacle to community enforcement is that each player observes the behavior of her partners in their partnerships with her, but not how they behave in other partnerships. We introduce a new metric for the rate at which information diffuses in a network, which we call viscosity, and show that it provides an operational measure for how conducive a network is to cooperation. We prove that clique networks have the lowest viscosity and that the optimal equilibrium of the clique generates more cooperation and higher average utility than any other equilibrium of any other network. This result offers a strategic foundation for the perspective that tightly knit groups foster the most cooperation. We apply this framework to analyze favor exchange arrangements, decentralized trade in networked markets, and social collateral.

Working paper 10/31/2012