Soft transaction∗

This paper suggests “soft debt” as a social convention that facilitates long-term reciprocal relationships. In each round of a two-player repeated game, one player develops a need for help from his counterpart, who may or may not be able to help. If help is rendered, a soft debt is tacitly accrued by him to his counterpart and added to the soft debt balance between them. The roles of potential beneficiary and provider of help, as well as the benefit and cost involved, are randomly drawn in each round. If the players follow soft debt strategies, i.e. they make decisions about offering and soliciting help based on the soft debt balance between them, then their expected future values of the relationship also depend on the balance. This consideration creates intertemporal incentives that promote reciprocity. Under discrete benefits, soft debt strategies are shown to constitute stationary Markov equilibria with trades provided that the cost structure meets certain conditions. The first best allocation is never achieved, but all trades that do occur in the equilibria are efficient.