Final Report Summary - MECHANISM REJECTION (Equilibrium Rejection of a Mechanism) Consider a couple contemplating marriage. This couple regards marriage as a mutual commitment which would constrain the choices each of them can make about his/her own life. Before finalizing their decision to get married, they have to discuss many parameters of their new life together including where they will get married, where they will live, how they will finance their future, if they will have children, etc. There is a possibility that they cannot agree on some of these issues and therefore they do not get married, at least for the time being. In this case, there is no commitment made and the potential spouses have access to the same set of choices as they had before they had started talking about marriage. However, once the question of marriage arises, it would be naïve to imagine that its alternative is the continuation of the status quo for this couple. For instance, if one party held a less conciliatory position during the failed marriage deliberations, the other one may start questioning the reliability of his/her partner. The statements made by these two people are not only the potential building blocks of a marriage agreement between them but also a means of signaling who they are to their partner. The information revealed by these signals is relevant in shaping the outside option for the marriage as it is relevant in devising the marriage.In the language of this research project, the two partners above are the players of an incomplete information default game, and marriage is a contract that they can sign with the purpose of constraining / coordinating their actions in this game. Other examples captured by this setting include competing firms deliberating a cartel agreement, bidders discussing the formation of an auction bidding ring, and disputing governments negotiating a peace settlement. Our objective is to find out what outcomes the players can achieve in the default game with the help of contracts.We insist on two points in our analysis. First, we exclusively consider the case where each potential participant can refuse to accept the contract and hence trigger the non-cooperative play of the default game. In essence, we rule out 'forced marriages' where at least one of the participants is coerced into an agreement against his will. Second, we exclude the possibility that the parties can commit to non-credible threats against other parties. For instance, if a firm does not want to participate in a cartel agreement, we do not allow some other firm to cut its price to zero just as a punishment for the non-participating firm. Instead, we require that each firm chooses the default game action that maximizes its expected payoff in case of a disagreement.What makes our analysis different from the well established standard mechanism design approach is the possibility of 'signaling'. We allow for the possibility that each party may choose to use the contracting procedures in order to signal their private information to the other parties. As a result, we identify some outcomes which are ruled to be unattainable for the contracting parties by the earlier literature but which turn out to be feasible once the signaling opportunities are taken into account.
