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Endogenous Monitoring

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  • Ichiro Obara

Abstract

In the standard model of dynamic interaction, players are assumed to receive public signals according to some exogenous distributions for free. We deviate from this assumption in two directions to consider an aspect of information structure in a more realistic way. We assume that signals are private rather than public and that each player needs to actively monitor the other player with some costs to observe the other player's behavior. In each stage, each player decides whether to monitor the other player with some costs in addition to which action to take. We first provide a class of strategies which approximate efficiency and describe some of its interesting properties, among them are (1) each player monitors the other player randomly like "random auditing" to reduce monitoring costs and (2) players cheat and monitor at the same time in their cooperative phase. In particular, this implies that cheating may happen (randomly) during collusion for efficiency reason. Then we discuss multi-task partnership games with endogenous monitoring, where two players play H games (tasks) instead of one. The additional twist is that we allow each player to choose freely which tasks to monitor. Our main result is that, how large the monitoring cost per task is, the efficient outcome can be approximated as players become patient when there is a large enough number of tasks. This result suggests that the size of a partnership tends to be large when active monitoring is important.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Ichiro Obara, "undated". "Endogenous Monitoring," UCLA Economics Online Papers 398, UCLA Department of Economics.
    • Handle: RePEc:cla:uclaol:398
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    File URL: http://www.econ.ucla.edu/people/papers/Obara/Obara398.pdf
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    References listed on IDEAS

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    1. Susan Athey & Kyle Bagwell & Chris Sanchirico, 2004. "Collusion and Price Rigidity," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 317-349.
    2. Michihiro Kandori & Ichiro Obara, 2006. "Efficiency in Repeated Games Revisited: The Role of Private Strategies," Econometrica, Econometric Society, vol. 74(2), pages 499-519, March.
    3. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
    4. Athey, Susan & Bagwell, Kyle, 2001. "Optimal Collusion with Private Information," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 428-465, Autumn.
    5. Ely, Jeffrey C. & Valimaki, Juuso, 2002. "A Robust Folk Theorem for the Prisoner's Dilemma," Journal of Economic Theory, Elsevier, vol. 102(1), pages 84-105, January.
    6. Ben-Porath, Elchanan & Kahneman, Michael, 2003. "Communication in repeated games with costly monitoring," Games and Economic Behavior, Elsevier, vol. 44(2), pages 227-250, August.
    7. Drew Fudenberg & Eric Maskin, 2008. "The Folk Theorem In Repeated Games With Discounting Or With Incomplete Information," World Scientific Book Chapters, in: Drew Fudenberg & David K Levine (ed.), A Long-Run Collaboration On Long-Run Games, chapter 11, pages 209-230, World Scientific Publishing Co. Pte. Ltd..
    8. Jeffrey C. Ely & Johannes Hörner & Wojciech Olszewski, 2005. "Belief-Free Equilibria in Repeated Games," Econometrica, Econometric Society, vol. 73(2), pages 377-415, March.
    9. Aoyagi, Masaki, 2002. "Collusion in Dynamic Bertrand Oligopoly with Correlated Private Signals and Communication," Journal of Economic Theory, Elsevier, vol. 102(1), pages 229-248, January.
    10. Piccione, Michele, 2002. "The Repeated Prisoner's Dilemma with Imperfect Private Monitoring," Journal of Economic Theory, Elsevier, vol. 102(1), pages 70-83, January.
    11. Glenn Ellison, 1994. "Theories of Cartel Stability and the Joint Executive Committee," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 37-57, Spring.
    12. Hitoshi Matsushima, 2004. "Repeated Games with Private Monitoring: Two Players," Econometrica, Econometric Society, vol. 72(3), pages 823-852, May.
    13. Ichiro Obara, 2000. "Private Strategy and Efficiency: Repeated Partnership Games Revisited," Econometric Society World Congress 2000 Contributed Papers 1449, Econometric Society.
    14. Eiichi Miyagawa & Yasuyuki Miyahara & Tadashi Sekiguchi, 2003. "Repeated Games with Observation Costs," KIER Working Papers 565, Kyoto University, Institute of Economic Research.
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    Cited by:

    1. Flesch, János & Perea, Andrés, 2009. "Repeated games with voluntary information purchase," Games and Economic Behavior, Elsevier, vol. 66(1), pages 126-145, May.
    2. Hino, Yoshifumi, 2019. "An efficiency result in a repeated prisoner’s dilemma game under costly observation with nonpublic randomization," Mathematical Social Sciences, Elsevier, vol. 101(C), pages 47-53.
    3. Ichiro Obara, 2004. "Efficiency in Repeated Games Revisited: The Role of Private Strategies (with M. Kandori)," UCLA Economics Online Papers 281, UCLA Department of Economics.
    4. Michihiro Kandori & Ichiro Obara, 2006. "Efficiency in Repeated Games Revisited: The Role of Private Strategies," Econometrica, Econometric Society, vol. 74(2), pages 499-519, March.
    5. Liu, Qingmin & Skrzypacz, Andrzej, 2014. "Limited records and reputation bubbles," Journal of Economic Theory, Elsevier, vol. 151(C), pages 2-29.
    6. Awaya, Yu, 2014. "Community enforcement with observation costs," Journal of Economic Theory, Elsevier, vol. 154(C), pages 173-186.
    7. Qingmin Liu, 2006. "Information Acquisition and Reputation Dynamics," Discussion Papers 06-030, Stanford Institute for Economic Policy Research.
    8. Yasuyuki Miyahara & Tadashi Sekiguchi, 2016. "Finitely Repeated Games with Automatic and Optional Monitoring," Discussion Papers 2016-12, Kobe University, Graduate School of Business Administration.
    9. Flesch, J. & Perea ý Monsuwé, A., 2007. "Repeated games with voluntary information purchase," Research Memorandum 057, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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