A fundamental problem in economics (and other fields) is how parties divide surplus that may be available through exchange, joint production, or other potentially beneficial transactions. While much attention has been given to this problem recently, it has typically been assumed in the literature, explicitly or implicitly, that agents can credibly commit themselves to a path of action or that they can write enforceable contracts. This is the case, for example, in the large literature on the bargaining problem and contract theory. Very little attention has been given to the case where, for some reason, commitment or enforcement is not possible. This project seeks to understand the nature of transactions under such conditions. Absent enforcement technology, agents must seek an agreement that is self enforcing, i.e., such that it is in the best interest of each agent to execute his part of the agreement even if there is no way to force him to do so. The project studies self enforcing procedures in two classes of problems. One is the execution of joint projects, where agents can free ride on the contributions of others. Another is the relation between two parties such as an employer and worker, where surplus can be generated if the worker works and the employer pays him. The aim is to characterize the set of self enforcing procedures, to discuss their properties and particularly to determine how the lack of enforcement affects the social welfare associated with the exchange. Finally, the project studies the way agents choose a procedure for reaching agreements when enforcement is limited. This project is very important because so many significant economic problems can be studies using the results from this research. For example, the research on joint projects could be used to study how the costs of an R&D venture, a public project, or a joint research paper are divided among different partners. In this example one partner may be unwilling to complete his part before the other partner or partners make some contribution if it is difficult to enforce a contract among the partners. Partners would choose procedures whereby the task is divided into small parts, and these parts are completed sequentially. The results for this research could be applicable to areas outside economics. For example, the execution of the Camp David peace treaty between Israel and Egypt was designed to take the form of sequential, alternating steps because the parties were aware of the enforcement problems.
