Implementing the Nash Program in Stochastic Games

Dilip Abreu and David Pearce
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Dilip Abreu: Princeton University
David Pearce: New York University

No 1479, Working Papers from Princeton University, Department of Economics, Econometric Research Program.

Abstract: Nash' noncooperative and cooperative foundations for bargaining with threats are reinterpreted to achieve equilibrium selection in infinitely repeated two player games. The analysis is then extended to stochastic games, where players' choices affect the state transition matrix. Sufficient conditions on the exogenous structure of the game are provided that ensure a unique division of surplus in the stochastic game, supported by both an axiomatic and a noncooperative analysis. Some comparative dynamics results for simple classes of games illustrate the dynamic programming principles governing how bargaining power in a subgame is transferred to the preceding period, and affects behavior in that earlier period. An example illustrates the surprising potential for a bargainer to extort resources from an apparently stronger competitor.

Keywords: game theory; games; Nash; bargains; competition (search for similar items in EconPapers)
JEL-codes: C40 C50 C70 D02 D03 (search for similar items in EconPapers)
Date: 2013-06
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