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Endogeous Monitoring

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  • Michihiro Kandori
  • Ichiro Obara

Abstract

In the standard model of dynamic interaction, players are assumed to receive public signals according to some exogenous distributions for free. We deviate from this assumption in two directions to consider an aspect of information structure in a more realistic way. We assume that signals are private rather than public and that each player needs to actively monitor the other player with some costs to observe the other player's behavior. In each stage, each player decides whether to monitor the other player with some costs in addition to which action to take. We first provide a class of strategies which approximate efficiency and describe some of its interesting properties, among them are (1) each player monitors the other player randomly like "random auditing" to reduce monitoring costs and (2) players cheat and monitor at the same time in their cooperative phase. In particular, this implies that cheating may happen (randomly) during collusion for efficiency reason. Then we discuss multi-task partnership games with endogenous monitoring, where two players play H games (tasks) instead of one. The additional twist is that we allow each player to choose freely which tasks to monitor. Our main result is that, how large the monitoring cost per task is, the efficient outcome can be approximated as players become patient when there is a large enough number of tasks. This result suggests that the size of a partnership tends to be large when active monitoring is important.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 752.

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Date of creation: 2004
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Handle: RePEc:red:sed004:752

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Related research

Keywords: Private Monitoring; Monitoring Cost;

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References

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  1. Susan Athey & Kyle Bagwell & Chris Sanchirico, 2004. "Collusion and Price Rigidity," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 317-349.
  2. Ichiro Obara, 2000. "Private Strategy and Efficiency: Repeated Partnership Games Revisited," Econometric Society World Congress 2000 Contributed Papers 1449, Econometric Society.
  3. Piccione, Michele, 2002. "The Repeated Prisoner's Dilemma with Imperfect Private Monitoring," Journal of Economic Theory, Elsevier, Elsevier, vol. 102(1), pages 70-83, January.
  4. Michihiro Kandori & Ichiro Obara, 2003. "Efficiency in Repeated Games Revisited: The Role of Private Strategies," CIRJE F-Series, CIRJE, Faculty of Economics, University of Tokyo CIRJE-F-255, CIRJE, Faculty of Economics, University of Tokyo.
  5. Jeffrey C. Ely & Johannes Hörner & Wojciech Olszewski, 2005. "Belief-Free Equilibria in Repeated Games," Econometrica, Econometric Society, Econometric Society, vol. 73(2), pages 377-415, 03.
  6. Athey, Susan & Bagwell, Kyle, 2001. "Optimal Collusion with Private Information," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 428-65, Autumn.
  7. Eiichi Miyagawa & Yasuyuki Miyahara & Tadashi Sekiguchi, 2003. "Repeated Games with Observation Costs," Discussion Papers, Columbia University, Department of Economics 0203-14, Columbia University, Department of Economics.
  8. 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.
  9. Edward J Green & Robert H Porter, 1997. "Noncooperative Collusion Under Imperfect Price Information," Levine's Working Paper Archive 1147, David K. Levine.
  10. Aoyagi, Masaki, 2002. "Collusion in Dynamic Bertrand Oligopoly with Correlated Private Signals and Communication," Journal of Economic Theory, Elsevier, Elsevier, vol. 102(1), pages 229-248, January.
  11. Jeffrey Ely, 2000. "A Robust Folk Theorem for the Prisoners' Dilemma," Econometric Society World Congress 2000 Contributed Papers 0210, Econometric Society.
  12. Ben-Porath, Elchanan & Kahneman, Michael, 2003. "Communication in repeated games with costly monitoring," Games and Economic Behavior, Elsevier, Elsevier, vol. 44(2), pages 227-250, August.
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Cited by:
  1. Michihiro Kandori & Ichiro Obara, 2003. "Efficiency in Repeated Games Revisited: The Role of Private Strategies," CIRJE F-Series, CIRJE, Faculty of Economics, University of Tokyo CIRJE-F-255, CIRJE, Faculty of Economics, University of Tokyo.
  2. Flesch, János & Perea, Andrés, 2009. "Repeated games with voluntary information purchase," Games and Economic Behavior, Elsevier, Elsevier, vol. 66(1), pages 126-145, May.
  3. Flesch, János & Perea, Andrés, 2007. "Repeated Games with Voluntary Information Purchase," Research Memorandum 057, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  4. Qingmin Liu, 2006. "Information Acquisition and Reputation Dynamics," Discussion Papers, Stanford Institute for Economic Policy Research 06-030, Stanford Institute for Economic Policy Research.
  5. Ichiro Obara, 2004. "Efficiency in Repeated Games Revisited: The Role of Private Strategies (with M. Kandori)," UCLA Economics Online Papers 281, UCLA Department of Economics.

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