Discounted stochastic games with voluntary transfers

Abstract

This paper studies discounted stochastic games with perfect or imperfect public monitoring and the opportunity to conduct voluntary monetary transfers and possibly burn money. This generalization of repeated games with transfers is ideally suited to study relational contracting in applications with long-term investments and also allows to study collusive industry dynamics. We show that for all discount factors every perfect public equilibrium payoff can be implemented with a class of simple equilibria that have a stationary structure on the equilibrium path and optimal penal codes with a stick-and-carrot structure. We develop an algorithm for perfect monitoring to compute the set of equilibrium payoffs and find simple equilibria that implement these payoffs.