Dilip Abreu: Equilibrium Selection in Repeated Games with Patient Players
What determines the path of play in an infinitely repeated game? Typically the players’ interests are not perfectly aligned but there is scope for cooperation. Potential surplus could be shared in different ways. The folk theorems of repeated games provide no guidance about the outcome. In the more tractable setting where players can sign binding contracts after any history of play, Abreu and Pearce (2007) show that slight reputational perturbations of the game lead to predictions consistent with Nash bargaining with threats (Nash, 1953). In
many settings of interest, such contracts are not available. Nonetheless, combining reputational perturbation with modest continuity and renegotiation conditions in two-person repeated games with patient players again isolates play that is consistent with Nash bargaining with threats.
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