Efficiency and observability with long-run and short-run players PDF
Preview Efficiency and observability with long-run and short-run players
"^orT*"^ Digitized by the Internet Archive in 2011 with funding from Boston Library Consortium IVIember Libraries http://www.archive.org/details/efficiencyobservOOfude of economics EFFICIENCY AND OBSERVABILITY WITH LONG-RUN AND SHORT-RUN PLAYERS Drew Fudenberg David K. Levine No. 591 October 1991 massachusetts institute of technology 50 memorial drive Cambridge, mass. 02139 EFFICIENCY AND OBSERVABILITY WITH LONG-RUN AND SHORT-RUN PLAYERS Drew Fudenberg David K. Levine No. 591 October 1991 je NOV 4 1991 1 RECtJvtb EFFICIENCY AND OBSERVABILITY WITH LONG-RUN AND SHORT-RUN PLAYERS Drew Fudenberg and ** David K. Levine May 1989 Revised: September 1991 * We are grateful to Eddie Dekel-Tabak, David M. Kreps and Eric Maskin. NSF Grants SES 87-088016 and SES 86-09697 provided financial support. ** Departments of Economics, MIT and UCLA, respectively. ABSTRACT We present a general algorithm for computing the limit, as 5 -> 1, of the set of payoffs of perfect public equilibria of repeated games with long-run and short-run players, allowing for the possibility that the players' actions are not observable by their opponents. We illustrate the algorithm with two economic examples. In a simple partnership we show how to compute the equilibrium payoffs when the folk theorem fails. In an investment game, we show that two competing capitalists subject to moral hazard may both become worse off if their firms are merged and they split the profits from the merger. Finally, we show that with short-run players each long-run player's highest equilibrium payoff is generally greater when their realized actions are observed. Keywords: Folk theorem, repeated games, long-run and short-run players JEL Classification: C70, C72, D74, D82
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