Ambiguity and long-run cooperation in strategic games

Marco Rojas and Damián Vergara

Oxford Economic Papers, 2021, vol. 73, issue 3, 1077-1098

Abstract: We study the effects of ambiguity on long-run cooperation in infinitely repeated strategic games. Using a simple parametric model of ambiguity, we study conditions for sustaining cooperative equilibria in the long-run. We apply our framework to the prisoner’s dilemma and duopoly models. We find that (i) ambiguity may affect the game’s structure eventually making the noncooperative equilibrium ex ante preferred; (ii) higher levels of ambiguity make long-run cooperation less likely since it makes punishment schemes less effective; and (iii) large levels of ambiguity may preclude the possibility of mutually beneficial long-run agreements, even when cooperation is beneficial from an ex ante perspective.

JEL-codes: C71 C72 C73 D43 D81 (search for similar items in EconPapers)
Date: 2021
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