Bounded Memory, Reputation, and Impatience
Reputation models typically assume players have full memory, yet in many applications this does not hold. This paper studies incomplete information games where players observe only finitely many recent periods, deriving a recursive characterization of the equilibrium payoff set that captures both stationary and previously unexplored non-stationary equilibria, as well as tools for studying purifiable (i.e. robust to payoff perturbations) equilibria. These tools are applied to a product choice game. For 1-period memory, I obtain the exact minimum and maximum purifiable equilibrium payoffs for almost all discount factors and prior beliefs on an "honest" firm type. For long memory, I characterize the minimum purifiable non-stationary equilibrium payoff and unique stationary payoff. In both cases, incomplete information and non-stationary behavior qualitatively change the equilibrium payoff set. These results hold for fixed discount factors independent of prior beliefs, and so do not require extreme patience.
|Date of creation:||Mar 2016|
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