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Bounded computational capacity equilibrium

Listed author(s):
  • Hernández, Penélope
  • Solan, Eilon

A celebrated result of Abreu and Rubinstein (1988) states that in repeated games, when the players are restricted to playing strategies that can be implemented by finite automata and they have lexicographic preferences, the set of equilibrium payoffs is a strict subset of the set of feasible and individually rational payoffs. In this paper we explore the limitations of this result. We prove that if memory size is costly and players can use mixed automata, then a folk theorem obtains and the set of equilibrium payoffs is once again the set of feasible and individually rational payoffs. Our result emphasizes the role of memory cost and of mixing when players have bounded computational power.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022053116000284
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 163 (2016)
Issue (Month): C ()
Pages: 342-364

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Handle: RePEc:eee:jetheo:v:163:y:2016:i:c:p:342-364
DOI: 10.1016/j.jet.2016.02.007
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  9. Ben-Porath Elchanan, 1993. "Repeated Games with Finite Automata," Journal of Economic Theory, Elsevier, vol. 59(1), pages 17-32, February.
  10. Abraham Neyman & Daijiro Okada, 2000. "Two-person repeated games with finite automata," International Journal of Game Theory, Springer;Game Theory Society, vol. 29(3), pages 309-325.
  11. Kalyan Chatterjee & Hamid Sabourian, 2000. "Multiperson Bargaining and Strategic Complexity," Econometrica, Econometric Society, vol. 68(6), pages 1491-1510, November.
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