Reconciling Relational Contracting and Hold-up: A Model of Repeated Negotiations.

The article introduces and develops the concept of Repeated Negotiation Equilibrium (RNE) as an alternative equilibrium selection in infinite-horizon stochastic games to better capture hold-up concerns and bargaining dynamics in long-term economic relationships. Unlike traditional Pareto optimal perfect public equilibria (PPE), which assume flexible history-dependent continuation payoffs, RNE incorporates an exogenous probability of renegotiation each period, leading to history-independent disagreement points and a continuum of equilibria between Markov perfect equilibria and Pareto optimal PPE. The framework unifies relational contracting and hold-up problems by allowing continuation play to be repeatedly renegotiated, thereby reflecting how current actions influence future bargaining positions. Applications demonstrate that RNE predicts gradual increases in vulnerability in principal–agent relationships, emphasizes the role of inside options over outside options in bargaining, alters comparative statics on property rights and investment incentives, and explains the emergence of arms races through strategic bargaining power—phenomena not captured by existing equilibrium concepts. The paper also addresses existence issues by proposing weak RNE, which always exist, and provides computational methods for RNE in strongly directional games.