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Repeated Games with Stochastic Discounting

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  • Baye, Michael R
  • Jansen, Dennis W

Abstract

This paper provides folk theorems for infinitely repeated games where the discount factor is stochastic. When discount factors are independently distributed and the current discount factor is unobservable prior to current actions, standard trigger strategies support a 'full' folk theorem when the infimum of the mean of the sequence of discount factors is sufficiently close to one. When players choose actions in each period after having observed the current discount factor, this result breaks down; payoffs on the boundary of the set of individually rational payoffs are unobtainable as Nash equilibrium average payoffs to the supergame. In order to highlight the impact of stochastic discounting on the analysis of supergames, we provide the stochastic discounting analogue to Friedman's perfect folk theorem. Copyright 1996 by The London School of Economics and Political Science.

Suggested Citation

  • Baye, Michael R & Jansen, Dennis W, 1996. "Repeated Games with Stochastic Discounting," Economica, London School of Economics and Political Science, vol. 63(252), pages 531-541, November.
  • Handle: RePEc:bla:econom:v:63:y:1996:i:252:p:531-41
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    Cited by:

    1. Pedro Dal Bó, 2007. "Tacit collusion under interest rate fluctuations," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 533-540, June.
    2. Huw Dixon & Joshy Easaw, 2001. "Strategic Responses to Regulatory Policies: What Lessons Can Be Learned from the U.K. Contract Gas Market?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 18(4), pages 379-396, June.
    3. Pedro Dal Bó, 2005. "Cooperation under the Shadow of the Future: Experimental Evidence from Infinitely Repeated Games," American Economic Review, American Economic Association, vol. 95(5), pages 1591-1604, December.
    4. Barlo, Mehmet & Urgun, Can, 2011. "Stochastic discounting in repeated games: Awaiting the almost inevitable," MPRA Paper 28537, University Library of Munich, Germany.
    5. Pedro Dal Bo, 2002. "Three Essays on Repeated Games," Levine's Working Paper Archive 618897000000000038, David K. Levine.

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