Myopic perception in repeated games

Abstract

In obtaining the celebrated folk theorem, not only everyone must value his future sufficiently high, but also everyone must be perceived so by the others. This common perception of players' time preferences must be maintained even after someone deviates. This paper explores the implications of myopic perception in repeated games with perfect monitoring. Under myopic perception, a deviator will not be perceived as a long-run player in the continuation game, which in turn affects the equilibria in the repeated game before deviation. We develop an algorithm to compute a set that characterizes almost all equilibrium payoffs when the discount factor is sufficiently high. When the stage game has a unique Nash equilibrium and it strictly dominates all other stage-game payoffs, then under myopic perception, the corresponding repeated game has a unique subgame perfect equilibrium.