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Cover of: The Social Equilibrium of Relational Arrangements
Parikshit Ghosh, Debraj Ray

The Social Equilibrium of Relational Arrangements

Section: Articles
Volume 179 (2023) / Issue 3, pp. 579-615 (37)
Published 30.11.2023
DOI 10.1628/jite-2023-0044
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  • 10.1628/jite-2023-0044
The enforcement of relational contracts is especially challenging for anonymous environments in which new partnerships can be started after a transgression. Building on Ghosh and Ray (1996), we study bilateral partnership norms that exhibit gradually increasing cooperation, thereby deterring deviations. But such gradualism must be incentive-compatible for partners. We argue that incomplete information regarding partner patience solves this problem even though it further exacerbates the overall lack of information. Socially beneficial gradualism now becomes bilaterally desirable. We also study a version of our problem with one-sided moral hazard, and discuss analytical approaches to environments with richer gradations of incomplete information.