Binding contract
In game theory, the term contract binding describes the ability of parties to bind themselves to statements and promises by means of a mutual contract. The conclusion of contracts embodies one of eight game - theoretical self-commitment strategies .
definition
A contract requires a mutual commitment between two parties, a so-called contract . Generally, a contract requires a party to, to provide for the benefit of the other party something to do or refrain. The contractual relationship between the two parties is fundamentally geared towards longer cooperation and is characterized by mutual trust . In game theory, contractual ties are a simple means of increasing the self-commitment of a party (in game theory called a player ).
Importance in game theory
The ability for players to enter into binding contracts exists in both cooperative and non-cooperative game theory . This classic subdivision in game theory is, however, often linked in the literature to whether it is possible to conclude binding contracts or not. If the players cannot conclude binding contracts, the solution to the game must be a self-stabilizing equilibrium (e.g. Nash equilibrium ). For non-cooperative games, the possibility of entering into binding contracts gives players an additional game option .
In fact, contracts are in particular an instrument of self-commitment. The idea is to arrange things in such a way that it is in your own interest to actually follow this self-commitment. It is important to generate credibility . If credibility is to be generated plausibly, written contracts are very suitable.
Design options
In order to influence the other players in their strategic decisions , the credibility can be generated by means of contractual agreements, regulations and penalty clauses. The risk of possible temptations , for example to do something or not to do something at the moment, is minimized. In order for the game theory approach of contract binding to be truly successful, the player who enforces a certain behavior or receives a penalty must have an independent incentive .
If the players conclude a binding contract with other players or persons outside the game, this is referred to as the possibility of external (self-) binding.
It is also possible to enter into contracts that are then enforced by a neutral person. This neutral person is characterized by the fact that he or she has no personal interest in whether the contract is kept or not. The easiest way to do this is to create a reputation effect , because contracts alone cannot overcome the credibility problem in game theory. Additional instruments of credibility are required, for example the employment of a third player who has an independent interest in enforcing the contract or who has his own reputation at stake. If the reputation effect caused is strong enough, even the formalities of the contract are unnecessary.
Any form of communication is a form of contract. This obliges the respective player to use his sent characters in a certain way. Another way of influencing contracts is cutting off communication. The credible self-commitment occurs because an action is made irreversible. Extreme forms of this tactic can be seen in statements of the "last will" or wills . Since a contracting party no longer exists here, renegotiating the contract is practically impossible. Authorized third parties, such as a notary , must ensure that the contract is actually complied with.
The binding through contracts, however, has one crucial flaw: there are no mechanisms provided here to prevent renegotiations during the course of the game . A concluded contract becomes worthless if there are no real incentives for the player to fulfill it. In such a case, renegotiations are of mutual interest. An attempt will be made to negotiate with the argument that the contract will be kept anyway, because there are no advantages or disadvantages for the two players.
Peculiarity of the imperfect contracts
A complementary way of looking at this game-theoretic situation results from the principal-agent theory of economics . As an integral part of contract theory, it deals with situations in which one player instructs another to do something. The classic example of this is the business owner-manager relationship. In this case, the commissioning player is the principal , while the commissioner acts as the executing agent . This constellation typically always results in behavioral interdependencies and conflicts of interest, because each of the two pursues individual goals .
In addition, the information is often distributed asymmetrically , so that it can be assumed that the agent has an information advantage that he can use for his purposes. This fact is known as incompleteness of contracts . To resolve the conflict of interest , an optimal contract offer should be submitted under conditions of participation and incentive compatibility .
The illustration opposite shows possible additional assumptions about the behavior, level of information and interactions of the players.
Mathematically, the behavior of principal and agent is best analyzed in situations with strategically crucial interactions. Here again, the game-theoretic distinction between cooperative and non-cooperative games must be observed.
The principal-agent theory is basically used in non-cooperative game theory. Nevertheless, approaches from cooperative games are also relevant for various problems between the principal and his agent.
The behavioral assumptions in the principal-agent theory can also be analyzed using descriptive- positive and normative models . The descriptive-positive branch is based on predictions of individual behavior. This is often the explanation for problems arising. The aim of these analysis models is to reveal the problem structures and their main influencing factors and to present them transparently. Normative models deal with the derivation of behavioral recommendations for the individual players according to the motto: “Which rules of the game enable the avoidance of socially undesirable results?” This mechanism design includes, as a sub-area, the normative principal-agent theory.
At the end of the principal-agent topic complex, the attached figure outlines typical problems using the example of internal cooperation (owner-manager relationship).
Examples of contractual relationships
Renegotiations of binding contracts
Someone wants to go on a diet, but has already had several failed attempts. This person is now offering € 5,000 to anyone who catches them eating high calorie food. However, the person on the diet makes their financial commitment conditional on a donation of this € 5,000 for charitable purposes. This contract with the environment is practically worthless, since the rights and obligations from it are only distributed unilaterally. The € 5,000 will never be paid to anyone because the person concerned will never publicly violate the contract anyway. The area therefore has no interest in complying with this contract. Renegotiations are inevitable in this case. Because even if the € 5,000 were due, the player would have to donate it and would not benefit from it himself. For example, the dieter could immediately offer everyone € 5 "cash on hand" or spend a local round if he were released from the contract in this way. Each player naturally prefers this situation to a situation in which he receives nothing. The contract is nonsensical because the other players have no independent incentive to do something or not to do something.
Use of a neutral person
A rehabilitation center treats wealthy cocaine addicts by writing a letter in which the patient accuses themselves. This letter will be published if they are caught in a random urine sample. After signing this contract themselves, many addicted patients will try to buy themselves out. But the person who actually holds this letter is putting their job at risk if they accept patient renegotiations. Otherwise the rehabilitation center will lose its "good reputation", so its reputation is at stake. Therefore, employees who allow renegotiations will be fired immediately. The reputation effect ensures that the neutral person, in this case the rehabilitation center, ensures compliance with the contract.
Communication failure
When a player is unavailable, it can be difficult or even impossible to determine whether the rival is actually complying with a contract that has been signed. In this case, other people must be assigned to enforce the player's claims. For example, a will is carried out by a notary and not by the deceased himself. Likewise, there are no long debates about a smoking ban imposed by parents when the parents are away. But during their absence, such a prohibition can no longer be enforced with the children and is de facto ineffective.
literature
- Avinash K. Dixit , Barry J. Nalebuff: Game Theory for Beginners - Strategic Know-How for Winners . Schäffer-Poeschel, Stuttgart 1997, ISBN 978-3-7910-1239-1 (translated from American English by Christian Schütte).
- Volker Bieta, Wilfried Siebe: Game theory for executives . Wirtschaftsverlag Carl Ueberreuter, Vienna 1998, ISBN 3-7064-0409-5 (what managers can learn from the military about strategy).
Web links
- Markus Pasche [1] (PDF; 1.1 MB) Game theory, working material from the Friedrich Schiller University Jena
supporting documents
- ↑ Cf. Bieta, V., Game Theory for Managers, p. 223
- ↑ Cf. Bieta, V., Game Theory for Managers, p. 224
- ↑ Cf. Avinash Dixit : Game Theory for Beginners, p. 148 f.
- ↑ See Sandner, K., Fundamentals of the Principal-Agent Theory, pp. 3 f.
- ↑ See Sandner, K., Basics of the Principal-Agent Theory, p. 17
- ↑ See Sandner, K., Fundamentals of the Principal-Agent Theory, pp. 18 f.
- ↑ based on Avinash Dixit : Game Theory for Beginners, p. 146
- ↑ Avinash Dixit: Game Theory for Beginners. P. 148.
- ↑ See Avinash Dixit: Game Theory for Beginners, p. 149