Informal agreements

Informal agreements may have a powerful psychological impact on the parties that strike them. Very little related theory has been developed, but a recent framework proposed by Dufwenberg, Servátka & Vadovič is described. It is suggested that the framework might be usefully employed to develop the theory further. The key idea is to describe the situation in which agreements are struck as an ‘underlying game.’ The players negotiate about which strategy profile they might agree to play, and they subsequently also play that game. It is pointed out that the approach is parallel to that proposed by some founders of game theory, although their goal was to analyse binding contracts rather than informal agreements. Finally, some experimental evidence which may provide additional guidance for developing theory is also described.