The Sorry Clause
TILEC Discussion Paper No. 2017-002 (revised version of 2016-004)
CentER Discussion Paper No. 2017-002 (revised version of 2016-008)
42 Pages Posted: 25 Feb 2016 Last revised: 21 Jan 2017
Date Written: January 20, 2017
Abstract
When players face uncertainty in choosing actions, undesirable outcomes cannot be avoided. Accidental defections caused by uncertainty, that does not depend on the level of care, require a mechanism to reconcile the players. This paper shows the existence of a perfect sorry equilibrium in a game of imperfect public monitoring. In the sorry equilibrium, costly apology is self-imposed in case of accidental defections, making private information public and allowing cooperation to resume. Cost of the apology required to sustain this equilibrium is calculated, the efficiency characteristics of the equilibrium evaluated and outcomes compared to those from other bilateral social governance mechanisms and formal legal systems. It is argued that with the possibility of accidental defections, other social mechanisms have limitations, while formal legal systems can generate perverse incentives. Therefore, apologies can serve as a useful economic governance institution.
Keywords: Apology, Sorry, Imperfect Public Monitoring, Uncertainty, Social Norms, Economic Governance, Legal Institutions, Courts, Incentives.
JEL Classification: D08, K04, Z01
Suggested Citation: Suggested Citation