Repeated Games with Endogenous Discounting

Abstract

The paper studies infinitely repeated games in which the players’ rates of time preference may evolve over time, depending on what transpires in the game. A key result is that in any first best equilibrium of the repeated prisoners’ dilemma, the players must eventually cooperate. If we assume that the players become more patient as they obtain better outcomes, we show that cooperation prevails from the beginning of the game and is thus the unique outcome of any first best equilibrium. The latter result is suitably extended to all symmetric two player games. A separate contribution of the paper is to propose a framework in which intertemporal trade can emerge as a first best equilibrium of a repeated strategic interaction, generating predictions that differ from those in the standard framework.