We consider a repeated game, in which due to private information and a lack of flexible transfers, cooperation cannot be sustained efficiently. In each round, the buyer either buys from the seller or takes an outside option. The fluctuating outside option may be public or private information. When the buyer visits, the seller chooses what quality to provide. We find that the buyer initially forgoes mutually beneficial trades before then visiting more often than he would like to, myopically. Under private information, the relationship recurrently undergoes gradual self-reinforcing downturns when trust is broken and instantaneous recoveries when loyalty is shown.
Trust; Loyalty; Imperfect Monitoring;
- C72: Noncooperative Games
- C73: Stochastic and Dynamic Games • Evolutionary Games • Repeated Games
- C78: Bargaining Theory • Matching Theory
TSE Working Paper, n. 22-1327, March 2022