Starting small and renegotiation

This paper develops 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. An equilibrium in which the partners "start small" is studied and shown to be uniquely selected by a strong renegotiation condition. The characterization offers new insights into how relationships change as parties learn about each other and qualitative differences between situations of one- and two-sided incomplete information. In particular, slakes rise and types separate faster in the two-sided case. (C) 1999 Academic Press.