Modeling of a stable joint venture

Abstract

There are three important aspects which must be taken into account when the problem of stability of long-range cooperative agreements is investigated: time-consistency (dynamic stability) of the cooperative agreements,strategic stability and irrational behavior proofness. Timeconsistency (TC) involves the property that, as the cooperation develops cooperating partners are guided by the same optimality principle at each instant of time and hence do not possess incentives to deviate from the previously adopted cooperative behavior. Strategic stability (SS) means that the agreement is to be developed in such a manner that at least individual deviations from the cooperation by each partner will not give any advantage to the deviator. This means that the outcome of cooperative agreement must be attained in some Nash equilibrium, which will guarantee the strategic support of the cooperation. Irrational behavior proofness (IBP) must be also taken in account since not always one can be sure that the partners will behave rational on a long time interval for which the cooperative agreement is valid. The partners involved in the cooperation must be sure that even in the worst case scenario they will not loose compared with non cooperative behavior. The mathematical tool based on payoff distribution procedures(PDP)or imputation distribution procedures(IDP)is developed to deal with the above mentioned aspects of cooperation. These mathematical tools have been applied to construct stable joint venture. Executive Summary is available at pp. 50.