Transfers, Contracts and Strategic Games

CentER Discussion Paper Series No. 2007-24

17 Pages Posted: 16 Jun 2007

See all articles by John Kleppe

John Kleppe

Tilburg University - Tilburg University School of Economics and Management

Ruud Hendrickx

Tilburg University - Center for Economic Research (CentER)

Peter Borm

Tilburg University - Center for Economic Research (CentER); Tilburg University - Department of Econometrics & Operations Research

I. García-Jurado

University of Santiago de Compostela

G. Fiestras-Janeiro

Universidad de Vigo - Departemento de Estatistica e Investigacion Operativa

Date Written: March 1, 2007

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 strategy 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.

Keywords: monetary transfer scheme, transfer equilibrium, contract game, virtual subgame perfect equilibrium, Folk theorems

JEL Classification: C72

Suggested Citation

Kleppe, John and Hendrickx, Ruud and Borm, Peter E. M. and García-Jurado, Ignacio and Fiestras-Janeiro, G., Transfers, Contracts and Strategic Games (March 1, 2007). CentER Discussion Paper Series No. 2007-24, Available at SSRN: https://ssrn.com/abstract=993063 or http://dx.doi.org/10.2139/ssrn.993063

John Kleppe

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Ruud Hendrickx

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Peter E. M. Borm (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Department of Econometrics & Operations Research

Tilburg, 5000 LE
Netherlands

Ignacio García-Jurado

University of Santiago de Compostela ( email )

15706, Santiago de Compostela
Spain

G. Fiestras-Janeiro

Universidad de Vigo - Departemento de Estatistica e Investigacion Operativa

E.U. de Enx. Técn. Industrial.
Vigo, Pontevedra E-36200
Spain

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