Discussion Paper
Conditioning Institutions and Renegotiation
We propose a theory of contracting in long-term relationships, emphasizing the role of social institutions in conditioning players’ joint selection of Equilibria. Players adopt a social conditioning system in order to place boundaries on their recurrent negotiation and thereby sustain a desirable joint selection of equilibrium. Social conventions have value because players cannot freely reinterpret the labels attached to histories, in contrast to labels that the players might assign internally.