Renegotiation-proof relational contracts

- We analyze repeated two-player games with side payments and renegotiation.
- To characterize Pareto-optimal subgame perfect and renegotiation-proof payoffs, one can restrict attention to stationary contracts.
- We derive simple conditions to find subgame perfect and renegotiation-proof stationary contracts.
- Using examples like the prisonerʼs dilemma and a simplified Cournot game, we show how these results are applied.

We study infinitely repeated two-player games with perfect monitoring and assume that each period consists of two stages: one in which the players simultaneously choose an action and one in which they can transfer money to each other. In the first part of the paper, we derive simple conditions that allow a constructive characterization of all Pareto-optimal subgame perfect payoffs for all discount factors. In the second part, we examine different concepts of renegotiation-proofness and extend the characterization to renegotiation-proof payoffs.