Starting small and commitment

I study a model of a long-term partnership with two-sided incomplete information. The partners jointly determine the stakes of their relationship and individually decide whether to cooperate with or betray each other over time. I characterize the external-interim incentive efficient-equilibria. In these equilibria, the partners generally "start small," and the level of interaction grows over time. The types of players separate quickly. Further, cooperation between "good" types is viable regardless of how pessimistic the players are about each other initially. The quick nature of separation in an extremal equilibrium contrasts with the outcome selected by a strong renegotiation criterion (as studied in Watson (1999, J. Econ. Theory 85, 52-90). (C) 2002 Elsevier Science.