Promises and conventions - An approach to pre-play agreements

•The paper studies the impact of pecuniary incentives on the capacity of non-binding agreements to increase efficiency.•Bilateral promises are shown to be very effective in bringing about efficiency when actions are strategic complements.•Yet they deliver only marginal improvements when actions are strategic substitutes.•When negotiators choose an agreement facing uncertainty, the optimal agreement must compromise on surplus-maximization if actions are strategic substitutes.•The optimal agreement tends to maximize the surplus and the probability of compliance if actions are strong strategic complements.

I analyze how informal agreements can be sustained by moral emotions with regard to a large class of two-player games. Specifically, I assume that people feel guilty if they breach an agreement and that the guilt increases according to the degree of the harm inflicted on the other. A central insight is that it is easier to sustain efficient informal agreements if actions are strategic complements than if they are strategic substitutes. I complement this general insight by studying two specific cases where negotiators face uncertainty about the breach of the agreement. I show that while the optimal agreement in a game with strategic substitutes must compromise on surplus-maximization and efficiency, the optimal agreement in a game with sufficiently strong strategic complements tends to maximize both the surplus and the probability of compliance especially if the game is symmetric.