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Honesty and Informal Agreements

Dufwenberg, Martin and Servátka, Maroš and Vadovič, Radovan (2016): Honesty and Informal Agreements.

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Abstract

We develop, and experimentally test, models of informal agreements. Agents are assumed to be honest but suffer costs of overcoming temptations. We extend two classical bargaining solutions -- split-the-difference and deal-me-out -- to this informal agreement setting. For each solution there are two natural ways to do this, leaving us with 2x2 models to explore. In the experiment, a temptations-constrained version of deal-me-out emerges as the clear winner.

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