Stochastic Discounting in Repeated Games: Awaiting the Almost Inevitable

32 Pages Posted: 1 Feb 2011 Last revised: 3 Aug 2011

See all articles by Mehmet Barlo

Mehmet Barlo

Sabanci University

Can Urgun

Sabanci University

Date Written: August 2, 2011

Abstract

We study repeated games with pure strategies and stochastic discounting under perfect information, with the requirement that the stage game has at least one pure Nash action profile. Players discount future payoffs with a common, but stochastic, discount factor where associated stochastic discounting processes are required to satisfy Markov property, martingale property, having bounded increments, and possessing state spaces with rich ergodic subsets. We, additionally, demand that there are states resulting in discount factors arbitrarily close to 0, and that they are reachable with positive (yet, possibly arbitrarily small) probability in the long run. In this setting, we prove both the perfect Folk Theorem and our main result: The occurrence of any finite number of consecutive repetitions of the period Nash action profile, must almost surely happen within a finite time window no matter which subgame perfect equilibrium strategy is considered and no matter how high the initial discount factor is.

Keywords: Repeated Games, Stochastic Discounting, Stochastic Games, Folk Theorem, Stopping Time

JEL Classification: C72, C73, C79

Suggested Citation

Barlo, Mehmet and Urgun, Can, Stochastic Discounting in Repeated Games: Awaiting the Almost Inevitable (August 2, 2011). Available at SSRN: https://ssrn.com/abstract=1753024 or http://dx.doi.org/10.2139/ssrn.1753024

Mehmet Barlo (Contact Author)

Sabanci University ( email )

Orta Mahalle Üniversite Caddesi 27
81474 Tuzla, Istanbul, 34956
Turkey

Can Urgun

Sabanci University ( email )

Orta Mahalle Üniversite Caddesi 27
Istanbul, Orhanli, 34956 Tuzla 34956
Turkey