Sonata In Contracting

This thesis comprises two essays linked by their focus on problems in contracting and by their usage of game theory as the vehicle of analysis.;The first essay addresses the issue of how and why incomplete contracts might arise endogenously. It provides a model of contract formation that focuses on the differential bargaining power that is bestowed upon agents by the procedures implied by different contract settings. The model employs a multi-issue bargaining approach, and distinguishes between issue-by-issue bargaining, where issues are dealt with separately, and single-issue bargaining, where they are combined. Agents are free to bargain over the form of the equilibrium process. It is shown that this structure allows for incomplete contracts, in the form of issue-by-issue, or short-term agreements, to be derived as an equilibrium outcome for some environments. This is in contrast to much of the literature on incomplete contracts, which relies on the roles of unobservability or transaction costs in order to justify the imposition of incomplete contracts as equilibrium contract form by the modeler.;The second essay analyses an alternating offers bargaining game in which the payoff in every period in which no agreement has been reached is the outcome of a normal form stage game. Two insights are gained from this model: (i) only disagreement period opportunities available to a player when he makes an accept/reject decision can increase his game payoffs, and (ii) in general such negotiation games have many equilibria which are Pareto inefficient, even though the game is one of complete information and full rationality. There exist, however, stage games which lead to a unique efficient outcome if exit weakly dominates repeated play. An alternative interpretation of this model--relevant to implicit contracts--is as a repeated game with endogenous exit. In this context the model points to the restrictions imposed on equilibrium payoffs in potentially infinitely repeated games by the existence of the possibility of binding exit agreements. The set of supportable allocations, however, is generally smaller than the Folk Theorem literature would suggest