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We consider repeated games with side-payments: players have an endowment of wealth in each period in which transfers can be made. We show that if endowments are large enough and the common discount factor high enough, then a strongly renegotiation–proof equilibrium (SRP) in the sense of Farrell and Maskin exists. As the discount factor goes to 1, the set of(More)
We study trading models when the distribution of signals such as costs or values is not known to traders or the mechanism designer when the profit-maximizing trading procedure is designed. We present adaptive mechanisms that simultaneously elicit this information (market research) while maintaining incentive compatibility and maximizing profits when the set(More)
Dynamic consistency leads to Bayesian updating under expected utility. We ask what it implies for the updating of more general preferences. In this paper, we characterize dynamically consistent update rules for preference models satisfying ambiguity aversion. This characterization extends to regret-based models as well. As applications of our general(More)
A number of voters are in a television studio before a US presidential debate. They are asked the likelihood that the Democratic candidate will cut the budget deficit, as he claims. Some think it is likely and others unlikely. The voters are asked the same question again after the debate. They become even more convinced that their initial inclination is(More)
We study the implementation problem for exchange economies when agents can renegotiate the outcome assigned by the planner and can collude. We focus on the use of sequential mechanisms and present a simple su½cient condition for implementation with renegotiation in strong perfect equilibrium. We present an application to optimal risk sharing, showing that(More)
We build a game-theoretic model where aggression can be triggered by domestic political concerns as well as the fear of being attacked. In the model, leaders of full and limited democracies risk losing power if they do not stand up to threats from abroad. In addition, the leader of a fully democratic country loses the support of the median voter if he(More)
This paper brings mechanism design to the study of conflict resolution in international relations. We determine when and how unmediated communication and mediation reduce the ex ante probability of conflict, in a simple game where conflict is due to asymmetric information. Unmediated communication helps reducing the chance of conflict as it allows(More)
We propose a model of cycles of conflict and distrust. Overlapping generations of agents from two groups sequentially play coordination games under incomplete information about whether the other side consists of bad types who always take bad actions. Good actions may be misperceived as bad and information about past actions is limited. Conflict spirals(More)
We study a sequential investment model and offer a theory of the sunk cost fallacy as an optimal response to limited memory. As new information arrives, a decision-maker may not remember all the reasons he began a project. The initial sunk cost gives additional information about future net profits and should inform subsequent decisions. We show that in(More)