Finite Automata in Undiscounted Repeated Games with Private Monitoring

Julian Romero

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: I study two-player undiscounted repeated games with imperfect private monitoring. When strategies are restricted to those implementable by nite automata, fewer equilibrium outcomes are possible. When only two-state automata are allowed, a simple strategy, "Win-Stay, Lose-Shift," leads to cooperation. WSLS has the nice property that it is able to endogenously recoordinate back to cooperation after an incorrect signal. I show that WSLS is essentially the only equilibrium that leads to cooperation in the in nitely repeated Prisoner's Dilemma game. In addition, it is also an equilibrium for a wide range of 2 x 2 games. I also give necessary and su cient conditions on the structure of equilibrium strategies when players can use strategies implementable by fnite automata.

Keywords: Bounded Rationality; Finite Automata; Prisoner's Dilemma; Private Monitoring; Tit-For-Tat; Win-Stay Lose-Shift (search for similar items in EconPapers)
JEL-codes: C62 C72 C73 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2011-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pur:prukra:1260

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