Sep 11, 2011 Filed in: Working papers
With Heidi Gjertsen, Theodore Groves, Eduard Niesten, Dale Squires, and Joel Watson
Abstract: We model conservation agreements using contractual equilibrium, a concept introduced by Miller and Watson (2010) to model dynamic relationships with renegotiation. The setting takes the form of a repeated principal-agent problem, where the principal must pay to observe a noisy signal of the agent's effort. Lacking a strong external enforcement system, the parties rely on self-enforcement for their relational contract. We characterize equilibrium play (including how punishments and rewards are structured) and we show how the parties' relative bargaining powers affect their ability to sustain cooperation over time. We argue that the model captures important features of real conservation agreements and reveals the ingredients required for successful agreements.
Working paper 9/23/2010 (stay tuned for an updated version)
Nov 13, 2013 Filed in: Publications
With Joel Watson
Published in Econometrica, 81(6):2303–2350, November 2013.
Abstract: This paper proposes a new approach to equilibrium selection in repeated games with transfers, supposing that in each period the players bargain over how to play. Although the bargaining phase is cheap talk (following a generalized alternating-offer protocol), sharp predictions arise from three axioms. Two axioms allow the players to meaningfully discuss whether to deviate from their plan; the third embodies a “theory of disagreement”—that play under disagreement should not vary with the manner in which bargaining broke down. Equilibria that satisfy these axioms exist for all discount factors and are simple to construct; all equilibria generate the same welfare. Optimal play under agreement generally requires suboptimal play under disagreement. Whether patient players attain efficiency depends on both the stage game and the bargaining protocol. The theory extends naturally to games with imperfect public monitoring and heterogeneous discount factors, and yields new insights into classic relational contracting questions.