Mutually beneficial transactions can fail when payoffs are common knowledge

Evidence

Thus the customer prefers buying a good car to not buying a car at all, and he prefers this in turn to buying a ‘lemon’. (This is reflected in the hypothesis that 1—8 > 0 > — 8.) I now assume that these four pay-off values, —8, 1—(, 7, and a, are common knowledge. — Diego Gambetta, Trust - Making and Breaking Cooperative…, 892

Categorization

• DEFINE: Establishes the precise structure of the car-sale game and what ‘common knowledge’ means here — full payoff transparency for both parties.
• XREF: The backbone of the trust-threatens-observability analysis with Hardin: if everyone knows the salesman’s disposition, no transaction occurs. — connects to: Informed trading undermines the existence of competitive equilibrium — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 769