Imperfect Public Monitoring with a Fear of Signal Distortion
52 Pages Posted: 7 Nov 2014 Last revised: 22 Apr 2017
Date Written: March 24, 2017
This paper proposes a model of signal distortion in a two-player game with imperfect public monitoring. We construct a tractable theoretical framework where each player has the opportunity to distort the true public signal and each player is uncertain about the distortion technologies available to the other player. We show that when players evaluate strategies according to their worst-case guarantees—i.e., are ambiguity averse over certain distributions in the environment—perceived continuation payoffs endogenously lie on a positively sloped line. We then provide examples showing that, counterintuitively, identifying deviators can be harmful in enforcing a strategy profile; moreover, we illustrate how the presence of such signal distortion can sustain cooperation when it is impossible in standard settings. We show that the main result and examples are robust to a number of natural modifications to our setting. Finally, we extend our model to a repeated game where our concept is a natural generalization of strongly symmetric equilibria. In this setting, we prove an anti-folk theorem, showing that payoffs under our equilibrium concept are under general conditions bounded away from efficiency.
Keywords: linearity, imperfect public monitoring, repeated games, ambiguity aversion
JEL Classification: C72, C73, D83
Suggested Citation: Suggested Citation