We consider an infinitely repeated Bertrand game, in which prices are publicly observed and each firm receives a privately observed, i.i.d. cost shock in each period. We focus on symmetric perfect public equilibria (SPPE), wherein any "punishments" are borne equally by all firms. We identify a tradeoff that is associated with collusive pricing schemes in which the price to be charged by each firm is strictly increasing in its cost level: such "fully sorting" schemes offer efficiency benefits, as they ensure that the lowest-cost firm makes the current sale, but they also imply an informational cost (distorted pricing and/or equilibrium-path price wars), since a higher-cost ¯rm must be deterred from mimicking a lower-cost firm by charging a lower price. A rigid-pricing scheme, where a firm's collusive price is independent of its current cost position, sacrifices efficiency benefits but also diminishes the informational cost. For a wide range of settings, the optimal symmetric collusive scheme requires (i). the absence of equilibrium-path price wars and (ii). a rigid price. If firms are sufficiently impatient, however, the rigid-pricing scheme cannot be enforced, and the collusive price of lower-cost firms may be distorted downward, in order to diminish the incentive to cheat. When the

This paper studies optimal security design in a dynamic setting with an agency problem that arises when an agent in charge of a project can divert cash ows for his own consumption at the expense of an outside investor. Cash ows are unobservable and unveri…able by the investor who has the right to liquidate the project. Unlike previous analyses, we allow cash ows to be correlated over time. We solve for the optimal contract and show that it can be implemented using a credit line with an interest rate that increases with the balance on the credit line. This nding is consistent with the fact that the majority of commercial loans are lines of credit with performance pricing. In addition, we develop a new recursive method to deal with a correlated privately observed variable in dynamic agency settings. It allows us to reduce the dimensionality of the problem and obtain a closed-form solution for the optimal contract. I am extremely grateful to Peter DeMarzo for advice throughout the development of the paper. I also thank Fernando

Relational contracts can be used to provide incentives if the future value of a relationship between contracting parties is sufficiently large. But what happens if the relationship’s value is not commonly known? This paper studies optimal relational contract design in a principal-agent setting where the principal’s outside option is her private information. I show that incentive pro-vision is always less efficient than under symmetric information. The source of the inefficiency depends on the allocation of bargaining power. If the principal has strong bargaining power, the high-outside-option-type wants to mimic the low-outside-option-type to provide strong in-centives and then renege and walk away. If the agent has strong bargaining power, the low type wants to mimic the high type to receive a high transfer when the agent proposes compensation. Both types may want to mimic the other type simultaneously under some bargaining power distributions. I characterize when separation of types is optimal, how it occurs in equilibrium, and how this depends on the parties ’ bargaining positions. Information may be revealed through default or rejection, which may occur immediately or gradually, and may be delayed. ∗I am indebted to Ben Hermalin, Shachar Kariv, and Steve Tadelis for their continuous guidance, advice, and support. I thank Botond Kőszegi, Jon Levin, Kristóf Madarász, and participants at the Microeconomic Theory seminar and the Oliver E. Williamson seminar at UC Berkeley for helpful comments.

This paper considers self-enforcing trade agreements among privately informed governments. A trade agreement that uses weak bindings (i.e., maximal tari ¤ levels) is shown to o¤er advan-tages relative to a trade agreement that uses strong bindings (i.e., precise tari ¤ levels). Con-sistent with practice, the theory also predicts that governments sometimes apply tari¤s that are strictly below their bound rates. When private information is persistent through time, an enforcement ratchet e¤ectis identi…ed: a government reveals that it is weak,and thus that it is unlikely to retaliate in an e¤ective manner, when it applies a low tari¤. This e¤ect suggests that a government with a low type may poolat an above-optimal tari¤, in order to conceal weakness. It also suggests a new information-based theory of gradualism in trade agreements.

Abstract. This note comments on Feuerstein’s (Feuerstein, Switgard, BCollusion in industrial economics: A survey, ^ forthcoming in Journal of Industry, Competition and Trade, 2005) survey of collusion theory. I start by presenting evidence from a recent real-world collusion case: the lysine industry. Based on this, I point out a few areas where collusion theory can improve: (a) the problem of equilibrium choice (bargaining over each firm’s share), which is especially important in asymmetric oligopolies; (b) the problem of equilibrium implementation, including in particular communication in an asymmetric information context; and (c) the relation between price wars and collusion. I conclude with a few notes on policy issues, namely leniency programs and cartel detection strategies.

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Abstract. We analyze discounted repeated games with incomplete information, such that the players ’ payoffs depend only on their own type (known-own payoff case). We describe an algorithm for finding all equilibrium payoffs in games for which there exists an open set of belief-free equilibria of Hörner and Lovo [2009]. This includes generic games with one-sided incomplete information and a large and important class of games with multi-sided incomplete information. When players become sufficiently patient, all Bayesian Nash equilibrium payoffs can be approximated by payoffs in sequential equilibria in which information is revealed finitely many times. The set of equilibrium payoffs is typically larger than the set of equilibrium payoffs in repeated games without discounting, and larger than the set of payoffs obtained in belief-free equilibria. The results are illustrated in bargaining and oligopoly examples. 1.

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We present a model that explains why investment bankers have struggled in recent years to manage conflicts of interest. The model captures two conflicting dimensions of reputation. On the one hand, banks can build a type reputation for technical competence by performing complex deals that may not serve their clients ’ interest; on the other hand, bankers can sustain a behavior reputation by refraining from doing so. Unproven banks favor type reputation over behavioral reputation; being ethical in our model is a luxury reserved for banks that have proven their abilities. The model also sheds light on conflicts between the trading and advisory divisions of investment banks, as well as the consequences of technological change for time variation in the relative strength of behavior- and type- reputational concerns.