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ABSTRACT:
This paper reports the analysis of a general model of contract in multi-period settings with both external and self-enforcement. In the model, players alternately engage in contract negotiation and take individual actions. A notion of contractual equilibrium, which combines a bargaining solution and individual incentive constraints, is proposed and analyzed. The modeling framework helps identify the relation between the manner in which players negotiate and the outcome of the long-term contractual relationship. In particular, the model shows the importance of accounting for the selfenforced component of contract in the negotiation process. Examples and guidance for applications are provided.

SUGGESTED CITATION:
Joel Watson, "Contract and Game Theory: Basic Concepts for Settings with Finite Horizons" (February 1, 2006). Department of Economics, UCSD. Paper 2006-01.
http://repositories.cdlib.org/ucsdecon/2006-01