Agreeing on Play with a Dislike to Lie- A Theory of Preplay Negotiation¤

Experimental evidence suggests that communication increases cooper-ation in the prisoner’s dilemma and contributions in public good games. This paper claims that this e¢ciency e¤ect may be driven by the guilt that is felt about breaching informal agreements. Informed by …ndings in social psychology, we construct a two-player model of preplay negotiation with players who are prone to feelings of guilt. We con…rm the e¢ciency e¤ect in the prisoner’s dilemma and in the public good game and derive many other testable predictions for these games. We call a strategy pro…le agreeable if agreements to play according to them would not be broken and if both players have an incentive to reach such an agreement. In supermodular games where payo ¤ increases in opponent’s action, if any non-equilibrium action pro…le above the equlib-rium is agreeable, then an outcome in the core of the game is agreeable. Symmetric submodular games, for instance, fail such a property