Abstract
This paper deals with markets with asymmetric information where transactions are repeated infinitely. It adds to the standard analysis the requirement that the equilibrium be renegotiation proof (RP). We show that when there are just one buyer and one seller there is no price that supports an RP equilibrium. When there are many buyers and sellers the minimum of the price that supports a no cheating RP equilibrium approaches infinity as the probability that an entering firm will find buyers approaches 1. Nonetheless, the market is “saved” if the probability that a particular seller is honest is strictly positive. The core of honest sellers imposes honest behavior on everybody else.
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