Perfect Public Equilibrium Research Articles

Efficiency and Observability with Long-Run and Short-Run Players

We present a general algorithm for computing the limit, as δ → 1, of the set of payoffs of perfect public equilibria of repeated games with long-run and short-run players, allowing for the possibility that the players′ actions are not observable by their opponents. We illustrate the algorithm with two economic examples. In a simple partnership we show how to compute the equilibrium payoffs when the folk theorem fails. In an investment game, we show that two competing capitalists subject to moral hazard may both become worse off if their firms are merged and they split the profits from the merger. Finally, we show that with short-run players each long-run player′s highest equilibrium payoff is generally greater when their realized actions are observed. Journal of Economic Literature Classification Numbers: C72, C73, D21, D82, D92, E22.

Credibility, smooth expectation and inflation persistence

This paper examines the situation where the public's inflationary expectation varies smoothly with current and past inflation realizations. We construct a stationary Markov perfect public equilibrium with a continuous expectations mechanism, in which government reputation plays an important role. The sustainable steady-state inflations are multiple and the degrees of persistence are indeterminate. This makes our equilibria explain not only high and persistent inflations but also equally abundant episodes of successful disinflations. Interestingly enough, the analysis here and the recent contributions to the dynamic seigniorage literature potentially may generate some observationally equivalent economic phenomena despite their marked contrasts in causes and effects.