Self-Evident Events and the Value of Linking

Abstract

We propose a theory of linking in long-term relationships based on what information becomes self-evident in equilibrium at the end of a stage game. We obtain a tight bound on the average per-period efficiency loss that must be incurred to enforce a stage-game outcome throughout a T-period repeated game when T is large. Our results apply to all monitoring structures and strategy profiles. They encompass the inefficiency result in Abreu, Milgrom, and Pearce (1991), as well as the approximate-efficiency results in Compte (1998), Obara (2009), and Chan and Zhang (2016).