Finitely Repeated Prisoners' Dilemma with Small Fines: Penance Contract
AbstractWe investigate the finitely repeated prisoners' dilemma with explicit contractual devices. We show that full collusion can be achieved by incentivizing the players' final period of play with small fines. Our incentivizing modality is the penance contract, by which a player is penalized if (and only if) he deviates from the penance strategy in the final period. We show that using this contractual agreement brings the penance strategy profile into unique subgame perfect equilibrium and achieves full collusion without being overturned by renegotiation.
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Bibliographic InfoPaper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-208.
Length: 18 pages
Date of creation: Mar 2010
Date of revision:
Other versions of this item:
- Hitoshi Matsushima, 2010. "Finitely Repeated Prisoners' Dilemma with Small Fines: Penance Contract," CIRJE F-Series CIRJE-F-720, CIRJE, Faculty of Economics, University of Tokyo.
- NEP-ALL-2010-09-18 (All new papers)
- NEP-GTH-2010-09-18 (Game Theory)
- NEP-MIC-2010-09-18 (Microeconomics)
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