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Monitoring Cooperative Agreements in a Repeated Principal-Agent Relationship
Roy Radner
Abstract
The situation in which a principal-agent relationship is repeated finitely many times (T) is formulated as a sequential game. For any Pareto-optimal cooperative arrangement in the one-period game that dominates a one-period Nash equilibrium, and any positive number epsilon, there exists for every sufficiently large T a (noncooperative) epsilon equilibrium of the T-period game that yields each player an average expected utility that is at least his expected utility in the one-period cooperative arrangement, less epsilon.
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