Topics in the Theory of Optimal Cooperation in Dynamic Games

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The project contributes to our understanding of economic applications of repeated games. It builds on important new techniques for characterizing repeated games developed by the investigator and it extends surprising and potentially significant results obtained by the investigator about repeated games under imperfect information. The high quality and significance of the investigator's past research show that he has the ability to successfully complete this project. The project consists of two parts. The first part develops an ingenious theory of implicit and explicit contracts. The theory is based on a model in which a principal negotiates a contract with an agent, making the latter's compensation contingent upon output (or some other publicly observable variable) but not upon some choice variable of the agent (perhaps the level of effort or care taken by the agent). Implicit inter-temporal contacts emerge in repeated games when the authorities (the courts) take into account only the output and not the choice variables but the principal can observe the choice variables and can retaliate against an agent who deviates from the implicit agreement. Implicit and explicit contracts are shown to coexist, but the principal will always pay the agent more than the amount called for in the explicit contract, if behavior is efficient. This is original research because this problem has never been rigorously analyzed. The results promise new insights into contracts (Why are non-binding clauses included in contracts?) and the relationship between business cycles and implicit labor contracts. The second part concerns the strategic dynamics of implicit collusion in markets with renewable resource, the so-called "Great Fish War" problem. The investigator shows how previous work can be generalized into a solution for this complicated and important problem.