Repeated Relationships with Limits on Information Processing

38 Pages Posted: 23 Jul 2008 Last revised: 28 Jul 2008

See all articles by Andrew Postlewaite

Andrew Postlewaite

University of Pennsylvania - Department of Economics

Olivier Compte

Paris School of Economics (PSE); Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS)

Date Written: July 23, 2008

Abstract

Many important strategic problems are characterized by repeated interactions among agents. Here is a large literature in game theory and economics illustrating how considerations of future interactions can provide incentives for cooperation that would not be possible in one-shot interactions. Much of the work in repeated games assumes public monitoring: players observe precisely the same thing at each stage of the game. It is well-understood that even slight deviations from public monitoring increase dramatically the difficulty the problems players face in coordinating their actions. Repeated games with private monitoring incorporate differences in what players observe at each stage. Equilibria in repeated games with private monitoring, however, often seem unrealistic; the equilibrium strategies may be highly complex and very sensitive to the fine details of the stochastic relationship between players' actions and observations. Furthermore, there is no realistic story about how players might arrive at their equilibrium strategies. We propose an alternative approach to understanding how people cooperate. Each player is endowed with a mental system that processes information: a mental system consists of a number of psychological states and a transition function between states that depends on observations made. In this world, a strategy is just a function from states to actions. Our framework has the following desirable properties: (i) players restrict attention to a relatively small set of simple strategies. (ii) the number of strategies that players compare is small enough that players might ultimately learn which perform well. We find that some mental systems allow agents to cooperate under a broad set of parameters, while others are not conducive to cooperation.

Keywords: Repeated Games, Private Monitoring, Mental States

JEL Classification: D01 , D70

Suggested Citation

Postlewaite, Andrew and Compte, Olivier, Repeated Relationships with Limits on Information Processing (July 23, 2008). PIER Working Paper No. 08-026, Available at SSRN: https://ssrn.com/abstract=1171373 or http://dx.doi.org/10.2139/ssrn.1171373

Andrew Postlewaite (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-7350 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~apostlew

Olivier Compte

Paris School of Economics (PSE)

48 Boulevard Jourdan
Paris, 75014 75014
France

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS) ( email )

28, rue des Saints-Peres
75007 Paris
France

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
45
Abstract Views
640
PlumX Metrics