On Sustaining Cooperation without Public Observations

This paper examines a dynamic game in which each player only observes a private and imperfect signal on the actions played. Our main result is that in a repeated prisoner's dilemma where defections are irreversible (at least for a long enough period of time), patient enough players may achieve almost efficient outcomes. Dealing with models of imperfect private monitoring is difficult because (i) continuation games are games of incomplete information, hence they do not have the same structure as the original game. In particular, continuation equilibria are correlated equilibria. (ii) Players are typically uncertain about their opponents' past observations and actions, and they use their entire own private history to learn about these actions. As a result equilibrium strategies are in general nontrivial and increasingly complex functions of past observations. We bypass these difficulties by looking at correlated equilibria of the original game and find correlated equilibria in which the decision problem faced by each player remains the same over time. Journal of Economic Literature Classification Numbers: C72.