Efficiency and observability with long-run and short-run players

68 Pages·1991·1.4 MB·English

by  Fudenberg, Drew

"^orT*"^

Digitized by the Internet Archive
in 2011 with funding from
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http://www.archive.org/details/efficiencyobservOOfude
of economics
EFFICIENCY AND OBSERVABILITY WITH
LONG-RUN AND SHORT-RUN PLAYERS
Drew Fudenberg
David K. Levine
No. 591 October 1991
massachusetts
institute of
technology
50 memorial drive
Cambridge, mass. 02139

EFFICIENCY AND OBSERVABILITY WITH
LONG-RUN AND SHORT-RUN PLAYERS
Drew Fudenberg
David K. Levine
No. 591 October 1991
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NOV 4 1991
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EFFICIENCY AND OBSERVABILITY WITH LONG-RUN AND SHORT-RUN PLAYERS
Drew Fudenberg
and
**
David K. Levine
May 1989
Revised: September 1991
*
We are grateful to Eddie Dekel-Tabak, David M. Kreps and Eric Maskin.
NSF Grants SES 87-088016 and SES 86-09697 provided financial support.
**
Departments of Economics, MIT and UCLA, respectively.
ABSTRACT
We present a general algorithm for computing the limit, as 5 -> 1, of the
set of payoffs of perfect public equilibria of repeated games with long-run
and short-run players, allowing for the possibility that the players' actions
are not observable by their opponents. We illustrate the algorithm with two
economic examples. In a simple partnership we show how to compute the
equilibrium payoffs when the folk theorem fails. In an investment game, we
show that two competing capitalists subject to moral hazard may both become
worse off if their firms are merged and they split the profits from the
merger. Finally, we show that with short-run players each long-run player's
highest equilibrium payoff is generally greater when their realized actions
are observed.
Keywords: Folk theorem, repeated games, long-run and short-run players
JEL Classification: C70, C72, D74, D82