The Emergence of Cooperation through Leadership

Abstract:     
We study the long-run outcomes of noisy asynchronous repeated games with players that are heterogeneous in their patience. The players repeatedly play a 2-by-2 coordination game with random pair-wise matching. The games are noisy because the players may make mistakes when choosing their actions and are asynchronous because only one player can move in each period. We characterize the long-run outcomes of Markov perfect equilibrium that are robust to the mistakes and show that if one player is sufficiently patient whereas the other players are not so patient, the efficient state can be the unique robust outcome even if it is risk-dominated. Because we need heterogeneity for the result, we argue that it enables the most patient player in effect to be the leader.

Number of Pages in PDF File: 25

Keywords: Equilibrium selection, Stochastic stability, Repeated game, Coordination game, Risk dominance

JEL Classification: C72, C73

working papers series