Dynamic Games and Dynamic Contract Theory

Abstract

The article provides a survey and exposition of recent developments in dynamic noncooperative game theory and dynamic contract theory. In realistic models of economic relationships, complex long-term agreements may be mutually beneficial; legal enforcement of contracts is difficult or impossible; assymmetries of information place limits on the use of other enforcement techniques; and competitive forces are too weak to prevent strategic behavior from influencing how relationships are organized. Dynamic contract theory allows significantly better explanations of behavior in such relationships than perfectly competitive models in which agents can make complete, perfectly enforceable long-term contracts. This article provides a general exposition of static and dynamic noncooperative game theory and provides an introduction to dynamic contract theory, with special emphasis on enforcement techniques.