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Finitely Repeated Prisoners' Dilemma with Small Fines: Penance Contract

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  • Hitoshi Matsushima

    (Faculty of Economics, University of Tokyo)

Abstract

We investigate the finitely repeated prisoners' dilemma with explicit contractual devices. We show that full collusion can be achieved by incentivizing the players' final period of play with small fines. Our incentivizing modality is the penance contract, by which a player is penalized if (and only if) he deviates from the penance strategy in the final period. We show that using this contractual agreement brings the penance strategy profile into unique subgame perfect equilibrium and achieves full collusion without being overturned by renegotiation.

Suggested Citation

  • Hitoshi Matsushima, 2010. "Finitely Repeated Prisoners' Dilemma with Small Fines: Penance Contract," CARF F-Series CARF-F-208, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  • Handle: RePEc:cfi:fseres:cf208
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    References listed on IDEAS

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