This paper shows the existence of a sorry equilibrium in a game of imperfect public monitoring. In equilibrium, a self-imposed costly apology tendered after an accidental defection, makes private information public, allowing for continued cooperation. This cost cannot be too high or too low. Efficiency of the sorry equilibrium is evaluated and its welfare outcomes compared to other informal governance mechanisms and the formal legal system. With the possibility of accidental defections, it is shown that informal mechanisms have limitations, while formal legal systems can generate perverse incentives. The analysis demonstrates that apologies serve as a useful economic governance institution.
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- imperfect public monitoring
- social norms
- economics governance
- Legal institutions