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Respond to the question: contracting model of regulation and comp?

03/05/2002 11:44 PM by Sungbin Cho; Re:contract theory as non-cooperative game: thank you and a comment

Well, I think Nash bargaining solution is not so restrictive in a sense that we can show that non-cooperative nargaining solution also coincides with Nash bargaining solution. One thin you can do, in my view, is to calculate the [View full text and thread]

02/25/2002 09:21 AM by arabella; contract theory as non-cooperative game: thank you and a comment

Sungbin: Thanks for your reply. It is as I had expected. I do have a further comment, however. If, as I find in my model, a continuum of subgame perfect equilibrium contracts exist, is it reasonable to employ the Nash bargaining [View full text and thread]

02/23/2002 03:08 PM by Sungbin Cho; Re:contracting model of regulation and compliance: cooperative or non-cooperative game?

Negotiation/contractual agreement does not necessarily imply the cooperative game. Think about the Rubistein bargaining model. Is it a cooperative bargaining? NO. The Rubinstein model is a "Non-Cooperative" bargaining model. Moreover, [View full text and thread]

02/23/2002 11:09 AM by arabella; contracting model of regulation and compliance: cooperative or non-cooperative game?

I am modelling a compliance and enforcement game between a regulator and a representative firm. An exogenous performance standard has been set by the regulator. Given the standard, the firm chooses the level of performance (e.g. average auto fleet fuel economy) its product will achieve, given its anticipation of the regulator's choice of enforcement level. The firm's cost (investment in improvement in performance) increases in the performance level chosen, and in the rate of enforcement chosen by the regulator. The regulator chooses 'tough' or 'lenient' enforcement, which involves a choice of expected fines for sub-standard compliance.
The payoffs are such that the subgame perfect Nash equ'm involves firm's choosing the lowest performance level, and regulator choosing lenient enforcement. Basically the regulator cannot commit to tough enforcement, since enforcement is assumed costly to the regulator.
I add a pre-play negotiation round in which the parties can agree to a set of transfers. This can be either a complete contract (if I assume firm's effort at compliance is verifiable) or incomplete (assuming opposite). In either case there exists a subgame perfect set of transfers that delivers the Pareto optimal outcome in which the regulator chooses lenient enforcement regardless of the firm's choice, but the firm chooses to comply fully with the standard. There actually exists a continuum of such transfers, such that I may want to impose a bargaining solution concept to make a sharper prediction. In any event, I claim that since I assume any contractual transfer agreement must be self-enforcing, rather than enforceable by assumption, that this is a non-cooperative game. A friend insists that whenever negotiation/contractual agreement is modelled it is a cooperative game. Who is right?

Thanks! [Manage messages]