Collaborative Research: Theoretical Investigations of Some Empirical Puzzles Regarding Behavior in Relationships with Asymmetric Information

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This project will develop formal microeconomic models to address two important questions that cannot be answered with current models.The first project will consider cooperation and enforcement in ongoing relationships. The goal is to develop explanations for important and poorly understood behavioral patterns in how partners punish bad behavior. For example, the criminal justice system is structured with more severe punishments for repeat offenses, a pattern we have observed in other relationships as well. Another example is seen in price-fixing cartels; firms refusing to adhere to a pre-existing cartel agreement by stealing business from cartel partners are often not punished by the cartel as a whole. Again, such non-punishment has also been observed in other contexts. While these patterns are widespread, standard economic theories of on-going relationships do not do an adequate job of predicting when we will observe such behavior. These theories predict instead that punishment should be of constant severity and should always be carried out. The principal investigators will develop a new theory to address these issues.The second project attempts to explain why a "50-50" norm is influential in a wide range of practical circumstances - such as joint ventures among corporations, share tenancy in agriculture, the division of restaurant tabs among friends - as well as in a variety of laboratory settings. The leading economic theories, which attribute this behavior to preferences for fairness, fail to provide a complete explanation for existing experimental evidence. The investigators will develop and analyze a new theory that postulates that people like to be perceived as fair, as well as preferring fair outcomes.