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Transfers, Contracts and Strategic Games

Author

Listed:
  • Kleppe, J.

    (Tilburg University, Center For Economic Research)

  • Hendrickx, R.L.P.

    (Tilburg University, Center For Economic Research)

  • Borm, P.E.M.

    (Tilburg University, Center For Economic Research)

  • Garcia-Jurado, I.
  • Fiestras-Janeiro, G.

Abstract

This paper analyses the role of transfer payments and strategic con- tracting within two-person strategic form games with monetary pay- offs. First, it introduces the notion of transfer equilibrium as a strat- egy combination for which individual stability can be supported by allowing the possibility of transfers of the induced payoffs. Clearly, Nash equilibria are transfer equilibria, but under common regularity conditions the reverse is also true. This result typically does not hold for finite games without the possibility of randomisation, and transfer equilibria for this particular class are studied in some detail. The second part of the paper introduces, also within the setting of finite games, contracting on monetary transfers as an explicit strategic option, resulting in an associated two-stage contract game. In the first stage of the contract game each player has the option of proposing transfer schemes for an arbitrary collection of outcomes. Only if the players fully agree on the entire set of transfer proposals, the payoffs of the game to be played in the second stage are modified accordingly. The main results provide explicit characterisations of the sets of payoff vectors that are supported by Nash equilibrium and virtual subgame perfect equilibrium, respectively.
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Suggested Citation

  • Kleppe, J. & Hendrickx, R.L.P. & Borm, P.E.M. & Garcia-Jurado, I. & Fiestras-Janeiro, G., 2007. "Transfers, Contracts and Strategic Games," Discussion Paper 2007-24, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:c0ebc3fa-b456-45e7-9c3e-b84925bdfdc1
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    References listed on IDEAS

    as
    1. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-894, July.
    2. Matthew O. Jackson & Simon Wilkie, 2005. "Endogenous Games and Mechanisms: Side Payments Among Players," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(2), pages 543-566.
    3. repec:ebl:ecbull:v:3:y:2003:i:6:p:1-7 is not listed on IDEAS
    4. Akira Yamada, 2003. "Efficient equilibrium side contracts," Economics Bulletin, AccessEcon, vol. 3(6), pages 1-7.
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    Cited by:

    1. Julio González-Díaz & Federica Briata & Ignacio García-Jurado & Fioravante Patrone, 2012. "Essential collections for equilibrium concepts," International Journal of Game Theory, Springer;Game Theory Society, vol. 41(3), pages 517-552, August.

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    More about this item

    Keywords

    monetary transfer scheme; transfer equilibrium; contract game; virtual subgame perfect equilibrium; Folk theorems;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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