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Repeated Games with Stochastic Discounting


  • Baye, Michael R
  • Jansen, Dennis W


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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    References listed on IDEAS

    1. Chaudhuri, Shubham & Ravallion, Martin, 1994. "How well do static indicators identify the chronically poor?," Journal of Public Economics, Elsevier, vol. 53(3), pages 367-394, March.
    2. Morley, Samuel & David Coady, 2003. "From Social Assistance to Social Development: Targeted Education Subsidies in Developing Countries," Peterson Institute Press: All Books, Peterson Institute for International Economics, number cgd376.
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    5. Schady, Norbert R, 2002. "Picking the Poor: Indicators for Geographic Targeting in Peru," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 48(3), pages 417-433, September.
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    7. Dreze, Jean & Stern, Nicholas, 1987. "The theory of cost-benefit analysis," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 14, pages 909-989 Elsevier.
    8. Glewwe, Paul & van der Gaag, Jacques, 1990. "Identifying the poor in developing countries: Do different definitions matter?," World Development, Elsevier, vol. 18(6), pages 803-814, June.
    9. Ravallion, M., 1992. "Poverty Comparisons - A Guide to Concepts and Methods," Papers 88, World Bank - Living Standards Measurement.
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    11. Behrman, Jere R. & Deolalikar, Anil B., 1988. "Health and nutrition," Handbook of Development Economics,in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 1, chapter 14, pages 631-711 Elsevier.
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    Cited by:

    1. 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.
    2. Barlo, Mehmet & Urgun, Can, 2011. "Stochastic discounting in repeated games: Awaiting the almost inevitable," MPRA Paper 28537, University Library of Munich, Germany.
    3. Pedro Dal Bo, 2002. "Three Essays on Repeated Games," Levine's Working Paper Archive 618897000000000038, David K. Levine.
    4. 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.
    5. Pedro Dal Bó, 2007. "Tacit collusion under interest rate fluctuations," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 533-540, June.

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