CONVENTIONAL CONTRACTS

A ''conventional'' contract is a contract that each side of a bargain expects the other side to insist on, because it is standard and custom ary under the circumstances. We consider a process of convention forma tion in which agents' expectations evolve through repeated interaction s in a large-population setting. Agents choose best replies given thei r knowledge of the precedents, subject to some inertia and random erro r in their choice behaviour. Over the long run, this adaptive learning process tends to select contracts that are efficient, and egalitarian in the sense that the payoffs are centrally located on the efficiency frontier of the payoff possibility set. When the payoffs form a conve x, comprehensive bargaining set, the process selects the Kalai-Smorodi nsky solution.