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The optimal degree of cooperation in the repeated Prisoners' Dilemma with side payments

Listed author(s):
  • Fong, Yuk-fai
  • Surti, Jay

In the infinitely repeated Prisoners' Dilemma with side payments, we characterize the Pareto frontier of the set of subgame perfect equilibrium payoffs for all possible combinations of discount factors. Play paths implementing Pareto dominant equilibrium payoffs are uniquely determined in all but the first period. Full cooperation does not necessarily implement these payoffs even when it maximizes total stage game payoffs. Rather, when the difference in players' discount factors is sufficiently large, Pareto dominant equilibrium payoffs are implemented by partial cooperation supported by repeated payments from the impatient to the patient player. When both players are sufficiently patient, such payoffs, while implemented via full cooperation, are supported by repeated payments from the impatient to the patient player. We characterize conditions under which public randomization has no impact on the Pareto dominant equilibrium payoffs and conditions under which such payoffs are robust to renegotiation.

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Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 67 (2009)
Issue (Month): 1 (September)
Pages: 277-291

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Handle: RePEc:eee:gamebe:v:67:y:2009:i:1:p:277-291
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622836

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  1. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
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  11. Mailath, George J. & Obara, Ichiro & Sekiguchi, Tadashi, 2002. "The Maximum Efficient Equilibrium Payoff in the Repeated Prisoners' Dilemma," Games and Economic Behavior, Elsevier, vol. 40(1), pages 99-122, July.
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