SBR-9422196 Joel Watson It is often beneficial for agents to form relationships in order to cooperate over time. Businesses create alliances and initiate joint ventures, countries sign treaties, managers seek to establish productive associations with their workers, and oligopolists seek to collude. In each case the parties involved hope for cooperation from their partners. One barrier to achieving cooperation is uncertainty about the motives of the other party and the risk of "being led down the garden path." If the uncertainty is too high, no cooperation may be possible. One solution is use a mechanism by which to credibly signal when cooperation can be sustained. For example, a country may show its willingness to adhere to a treaty by offering concessions on an unrelated issue. Another mechanism that may buffer the parties from the risk associated with asymmetric information is to begin the relationship on a small scale and build it gradually. In this way, a party that would not benefit from long-term cooperation may be induced to cheat early on when the stakes are low. This research project examines the implications of this idea for understanding how economic relationships evolve over time. "Starting small" appears to be ubiquitous. Take as an example bilateral treaties on arms reductions or troop withdrawals. It is rare to see a huge agreement made quickly, for this would be disastrous for the country that followed through if the other cheated. Instead, countries generally reach agreements in phases, starting with a small set of issues and then gradually adding more. This research compares the benefits from starting small with those of other signaling mechanisms, such advertising. The focus is on coordination in the face of incomplete information. The research identifies what path a relationship should take in order to develop a cooperative relationship with a minimum of risk. This abstract work is then applied to a number of settings: an employment model, a model of a debt market, an a model of collusion by oligopolists.
