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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; in revised form: 11 July 2013 / Accepted: 6 August 2013 / Published: 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.
Keywords: external enforcement; self-enforcement; negotiation; agreements; contractual equilibrium
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Watson, J. Contract and Game Theory: Basic Concepts for Settings with Finite Horizons. Games 2013, 4, 457-496.
Watson J. Contract and Game Theory: Basic Concepts for Settings with Finite Horizons. Games. 2013; 4(3):457-496.
Watson, Joel. 2013. "Contract and Game Theory: Basic Concepts for Settings with Finite Horizons." Games 4, no. 3: 457-496.