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Games 2013, 4(3), 457-496; doi:10.3390/g4030457

Contract and Game Theory: Basic Concepts for Settings with Finite Horizons

Department of Economics, University of California, San Diego, 9500 Gilman Drive, La Jolla, CA 92093-0508, USA
Received: 7 April 2013 / Revised: 11 July 2013 / Accepted: 6 August 2013 / Published: 21 August 2013
(This article belongs to the Special Issue Contract Theory)
View Full-Text   |   Download PDF [839 KB, 23 August 2013; original version 21 August 2013]   |  

Abstract

This paper examines a general model of contract in multi-period settings with both external and self-enforcement. In the model, players alternately engage in contract negotiation and take individual actions. A notion of contractual equilibrium, which combines a bargaining solution and individual incentive constraints, is proposed and analyzed. The modeling framework helps identify the relation between the manner in which players negotiate and the outcome of the long-term contractual relationship. In particular, the model shows the importance of accounting for the self-enforced component of contract in the negotiation process. Examples and guidance for applications are provided, along with existence results and a result on a monotone relation between “activeness of contracting” and contractual equilibrium values. View Full-Text
Keywords: external enforcement; self-enforcement; negotiation; agreements; contractual equilibrium external enforcement; self-enforcement; negotiation; agreements; contractual equilibrium
This is an open access article distributed under the Creative Commons Attribution License (CC BY 3.0).

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Watson, J. Contract and Game Theory: Basic Concepts for Settings with Finite Horizons. Games 2013, 4, 457-496.

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