The folk theorem for repeated games with observation costs |
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Authors: | Eiichi Miyagawa |
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Institution: | a Graduate School of Economics, Kobe University, 2-1 Rokkodai-cho, Nada-ku, Kobe 657-8501, Japan b Graduate School of Business Administration, Kobe University, 2-1 Rokkodai-cho, Nada-ku, Kobe 657-8501, Japan c Institute of Economic Research, Kyoto University,Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501, Japan |
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Abstract: | The folk theorem literature has been relaxing the assumption on how much players know about each other's past action. Here we consider a general model where players can “buy” precise information. Every period, each player decides whether to pay a cost to accurately observe the actions chosen by other players in the previous period. When a player does not pay the cost, he obtains only imperfect private signals. Observational decisions are unobservable to others. Known strategies such as trigger strategies do not work since they fail to motivate players to pay for information. This paper shows that the folk theorem holds for any level of observation costs. Unlike existing folk theorems with private monitoring, ours imposes virtually no restriction on the nature of costless imperfect signals. The theorem does not use explicit or costless communication, thereby having implications on antitrust laws that rely on evidence of explicit communication. The main message is that accurate observation alone, however costly, enables efficient cooperation in general repeated games. |
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Keywords: | C72 C73 D43 D82 K21 L13 L40 |
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