Advertisement

Economic Theory

, Volume 43, Issue 2, pp 143–166 | Cite as

Long-term relationships as safeguards

  • Rafael Rob
  • Huanxing YangEmail author
Research Article

Abstract

We analyze a repeated prisoners’ dilemma game played in a community setting with heterogeneous types. The setting is such that individuals choose whether to continue interacting with their present partner, or separate and seek a new partner. Players’ types are not directly observed, but may be imperfectly inferred from observed behavior. We focus on a class of equilibria that satisfy zero tolerance and fresh start. We find that the punishment for defecting and the reward for cooperating are driven by the formation and the dissolution of long-term, high-paying relationships: an individual who defects, aborts a long-term relationship that he is in, or that he might have entered into, is thrown into short-term interactions with individuals who are likely to defect and, consequently, receives low payoffs. On the flip side, an individual who cooperates, enters into or prolongs a long-term interaction with a partner who cooperates and, consequently, receives high payoffs.

Keywords

Community games Information flows Heterogeneity of types Long-term relationships 

JEL Classification

C73 C78 D82 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Abreu D., Pearce D., Stacchetti E.: Toward a theory of discounted repeated games with imperfect monitoring. Econometrica 58, 1041–1063 (1990)CrossRefGoogle Scholar
  2. Dal Bo P.: Social norms, cooperation and inequality. Econ Theory 30, 89–105 (2007)Google Scholar
  3. Datta, S.: Building trust. Working paper, London School of Economics, Mimeo (1993)Google Scholar
  4. Diamond P.: Aggregate demand management in search equilibrium. J Polit Econ 90, 881–894 (1982)CrossRefGoogle Scholar
  5. Dixit A.: On modes of economic governance. Econometrica 71, 449–481 (2003)CrossRefGoogle Scholar
  6. Eeckhout J.: Minorities and endogenous segregation. Rev Econ Stud 73, 31–53 (2006)CrossRefGoogle Scholar
  7. Ellison G.: Cooperation in the prisoners-dilemma with anonymous random matching. Rev Econ Stud 61, 567–588 (1994)CrossRefGoogle Scholar
  8. Frank R.: Passions Within Reason. Norton, New York (1988)Google Scholar
  9. Fudenberg D., Maskin E.: The folk theorem in repeated games with discounting or with incomplete information. Econometrica 54, 533–554 (1986)CrossRefGoogle Scholar
  10. Ghosh P., Ray D.: Cooperation in community Interaction without information flows. Rev Econ Stud 63, 491–519 (1996)CrossRefGoogle Scholar
  11. Johnson S., McMillan J., Woodruff C.: Courts and relational contracts. J Law Econ Organ 18, 211–277 (2002)CrossRefGoogle Scholar
  12. Kali R.: Endogenous business networks. J Law Econ Organ 15, 615–636 (1999)CrossRefGoogle Scholar
  13. Kandori M.: Social norms and community enforcement. Rev Econ Stud 59, 63–80 (1992)CrossRefGoogle Scholar
  14. Kranton R.: The formation of cooperative relationships. J Law Econ Organ 12, 214–233 (1996)Google Scholar
  15. Mortensen D.: Property rights and efficiency in mating, racing, and related games. Am Econ Rev 72, 968–979 (1982)Google Scholar
  16. Okuno-Fujiwara, M., Fujiwara-Greve, T.: Voluntarily separable prisoners’ dilemma. Working paper, University of Tokyo, Mimeo (2006)Google Scholar
  17. Rob, R., Yang, H.: Long-term relationships as safeguards. Working paper, Ohio State University, Mimeo (2005)Google Scholar
  18. Shapiro C., Stiglitz J.: Equilibrium unemployment as a worker disciplinary device. Am Econ Rev 74, 433–444 (1984)Google Scholar
  19. Sobel J.: Interdependent preferences and reciprocity. J Econ Lit 43, 392–436 (2005)CrossRefGoogle Scholar
  20. Sobel J.: For better or forever: formal versus informal enforcement. J Labor Econ 24, 271–297 (2006)CrossRefGoogle Scholar
  21. Taylor C.: The old-boy network and the young-gun effect. Int Econ Rev 41, 871–891 (2000)CrossRefGoogle Scholar
  22. Tirole J.: A theory of collective reputations. Rev Econ Stud 63, 1–22 (1996)CrossRefGoogle Scholar
  23. Watson J.: Starting small and renegotiations. J Econ Theory 85, 52–90 (1999)CrossRefGoogle Scholar
  24. Watson J.: Starting small and commitment. Games Econ Behav 38, 176–199 (2002)CrossRefGoogle Scholar
  25. Yang, H.: Nonstationary relational contracts. Working paper, Ohio State University, Mimeo (2007)Google Scholar

Copyright information

© Springer-Verlag 2008

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of PennsylvaniaPhiladelphiaUSA
  2. 2.Department of EconomicsThe Ohio State UniversityColumbusUSA

Personalised recommendations