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Efficiency and Observability with Long-Run and Short-Run Players

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  • D. Fudenberg
  • D. K. Levine

Abstract

We present a general algorithm for computing the limit, as δ → 1, of the set of payoffs of perfect public equilibria of repeated games with long-run and short-run players, allowing for the possibility that the players′ actions are not observable by their opponents. We illustrate the algorithm with two economic examples. In a simple partnership we show how to compute the equilibrium payoffs when the folk theorem fails. In an investment game, we show that two competing capitalists subject to moral hazard may both become worse off if their firms are merged and they split the profits from the merger. Finally, we show that with short-run players each long-run player′s highest equilibrium payoff is generally greater when their realized actions are observed.

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Bibliographic Info

Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 627.

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Date of creation: 01 Jan 1994
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Handle: RePEc:cla:levarc:627

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  1. Green, Edward J. & Porter, Robert H., 1982. "Noncooperative Collusion Under Imperfect Price Information," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 367, California Institute of Technology, Division of the Humanities and Social Sciences.
  2. Fudenberg, Drew & Maskin, Eric, 1986. "The Folk Theorem in Repeated Games with Discounting or with Incomplete Information," Econometrica, Econometric Society, Econometric Society, vol. 54(3), pages 533-54, May.
  3. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, Elsevier, vol. 27(2), pages 253-279, August.
  4. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
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