Informational Constraints and the Overlapping Generations Model: Folk and Anti-Folk Theorems

V Bhaskar

The Review of Economic Studies, 1998, vol. 65, issue 1, 135-149

Abstract: This paper analyses the sustainability of inter-generational transfers in Samuelson's consumption-loan model when agents are imperfectly informed about past events. We find that with mild informational constraints, transfers cannot be supported by pure-strategy equilibria. Mixed strategies allow transfers to be sustained even if agents have little information, so that a version of the Folk theorem holds. However, these equilibria are not robust. If each agent's utility function is subjected to a small random perturbation as in Harsanyi (1973), these mixed strategy equilibria unravel, and only the zero-transfer allocation survives as the unique rationalizable outcome. This result is an example of mixed strategy equilibrium of an extensive form game which cannot be purified.

Date: 1998
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Working Paper: Informational Constraints and the Overlapping Generations Model: Folk and Anti-Folk Theorems (1994)
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