Transfers, Contracts and Strategic Games

J. Kleppe, R.L.P. Hendrickx, P.E.M. Borm, I. Garcia-Jurado, G. Fiestras-Janeiro

Research output: Working paperDiscussion paperOther research output

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Abstract

This paper analyses the role of transfer payments and strategic con- tracting within two-person strategic form games with monetary pay- offs. First, it introduces the notion of transfer equilibrium as a strat- egy combination for which individual stability can be supported by allowing the possibility of transfers of the induced payoffs. Clearly, Nash equilibria are transfer equilibria, but under common regularity conditions the reverse is also true. This result typically does not hold for finite games without the possibility of randomisation, and transfer equilibria for this particular class are studied in some detail. The second part of the paper introduces, also within the setting of finite games, contracting on monetary transfers as an explicit strategic option, resulting in an associated two-stage contract game. In the first stage of the contract game each player has the option of proposing transfer schemes for an arbitrary collection of outcomes. Only if the players fully agree on the entire set of transfer proposals, the payoffs of the game to be played in the second stage are modified accordingly. The main results provide explicit characterisations of the sets of payoff vectors that are supported by Nash equilibrium and virtual subgame perfect equilibrium, respectively.
Original languageEnglish
Place of PublicationTilburg
PublisherOperations research
Number of pages17
Volume2007-24
Publication statusPublished - 2007

Publication series

NameCentER Discussion Paper
Volume2007-24

Fingerprint

Strategic games
Nash equilibrium
Contracting
Game form
Regularity
Subgame perfect equilibrium
Transfer payments
Strategic options
Randomization

Keywords

  • monetary transfer scheme
  • transfer equilibrium
  • contract game
  • virtual subgame perfect equilibrium
  • Folk theorems

Cite this

Kleppe, J., Hendrickx, R. L. P., Borm, P. E. M., Garcia-Jurado, I., & Fiestras-Janeiro, G. (2007). Transfers, Contracts and Strategic Games. (CentER Discussion Paper; Vol. 2007-24). Tilburg: Operations research.
Kleppe, J. ; Hendrickx, R.L.P. ; Borm, P.E.M. ; Garcia-Jurado, I. ; Fiestras-Janeiro, G. / Transfers, Contracts and Strategic Games. Tilburg : Operations research, 2007. (CentER Discussion Paper).
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Kleppe, J, Hendrickx, RLP, Borm, PEM, Garcia-Jurado, I & Fiestras-Janeiro, G 2007 'Transfers, Contracts and Strategic Games' CentER Discussion Paper, vol. 2007-24, Operations research, Tilburg.

Transfers, Contracts and Strategic Games. / Kleppe, J.; Hendrickx, R.L.P.; Borm, P.E.M.; Garcia-Jurado, I.; Fiestras-Janeiro, G.

Tilburg : Operations research, 2007. (CentER Discussion Paper; Vol. 2007-24).

Research output: Working paperDiscussion paperOther research output

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AB - This paper analyses the role of transfer payments and strategic con- tracting within two-person strategic form games with monetary pay- offs. First, it introduces the notion of transfer equilibrium as a strat- egy combination for which individual stability can be supported by allowing the possibility of transfers of the induced payoffs. Clearly, Nash equilibria are transfer equilibria, but under common regularity conditions the reverse is also true. This result typically does not hold for finite games without the possibility of randomisation, and transfer equilibria for this particular class are studied in some detail. The second part of the paper introduces, also within the setting of finite games, contracting on monetary transfers as an explicit strategic option, resulting in an associated two-stage contract game. In the first stage of the contract game each player has the option of proposing transfer schemes for an arbitrary collection of outcomes. Only if the players fully agree on the entire set of transfer proposals, the payoffs of the game to be played in the second stage are modified accordingly. The main results provide explicit characterisations of the sets of payoff vectors that are supported by Nash equilibrium and virtual subgame perfect equilibrium, respectively.

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Kleppe J, Hendrickx RLP, Borm PEM, Garcia-Jurado I, Fiestras-Janeiro G. Transfers, Contracts and Strategic Games. Tilburg: Operations research. 2007. (CentER Discussion Paper).