Repeated Cooperation with Outside Options

52 Pages Posted: 12 Feb 2008 Last revised: 20 Dec 2011

See all articles by Takako Fujiwara-Greve

Takako Fujiwara-Greve

Keio University - Faculty of Economics

Yosuke Yasuda

Osaka University - Graduate School of Economics

Date Written: December 20, 2011

Abstract

If agents can choose when to end a repeatable interaction as well as what to do within the partnership, cooperation incentives are interrelated with the ending decision. Using a Prisoner's Dilemma with outside options, we investigate how the structure of outside options affects the minimum discount factor that sustains mutual cooperation. One-sided outside options do not make cooperation easier than ordinary repeated games, but uncertainty of options reduces the difficulty by enabling cooperation until a good option realizes. Two-sided and very low outside options make cooperation easier than ordinary repeated games. Economic implications are also discussed.

Keywords: outside option, repeated Prisoner's Dilemma, cooperation

JEL Classification: C73

Suggested Citation

Fujiwara-Greve, Takako and Yasuda, Yosuke, Repeated Cooperation with Outside Options (December 20, 2011). Available at SSRN: https://ssrn.com/abstract=1092359 or http://dx.doi.org/10.2139/ssrn.1092359

Takako Fujiwara-Greve

Keio University - Faculty of Economics ( email )

2-15-45 Mita, Ninato-ku
Tokyo 1088345
Japan

Yosuke Yasuda (Contact Author)

Osaka University - Graduate School of Economics ( email )

1-7 Machikaneyama
Toyonaka, Osaka, 560-0043
Japan

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