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Finitely Repeated Games with Small Side Payments

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  • Hitoshi Matsushima

    (Faculty of Economics, University of Tokyo)

Abstract

This paper investigates repeated games with perfect monitoring, where the number of repetition is finite, and the discount factor is far less than unity. Players can make a side payment contract, but their liability is severely limited. The history of play may not necessarily be verifiable. With positive interest rate of the contractible asset, we show that, in spite of limited liability and verifiability, efficiency is sustainable in that there exist a contract and an efficient perfect equilibrium in its associated game, and that efficiency is even uniquely sustainable if there exists the unique one-shot Nash equilibrium. In partnership games, efficiency is uniquely and approximately sustainable, even if the interest rate equals zero. In partnership games with two players and positive interest rate, efficient sustainability is robust to renegotiation-proofness on the terms of explicit contracting as well as implicit agreements.

Suggested Citation

  • Hitoshi Matsushima, 2002. "Finitely Repeated Games with Small Side Payments," CIRJE F-Series CIRJE-F-179, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2002cf179
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2002/2002cf179.pdf
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    References listed on IDEAS

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