COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 920

"Renegotiation and Symmetry in Repeated Games"

Dilip Abreu, David G. Pearce and Ennio Stacchetti

May 1989

It seems reasonable to suppose that in repeated games in which communications is possible, play is determined through a process of negotiation and renegotiation as events unfold. In the absence of a satisfying theory of players’ bargaining power, it is unclear how to model this process. Symmetric repeated games are an important class in which the problem is less troublesome. Whatever its source, bargaining power is presumably the same for all players in a symmetric game. We take equal bargaining power to mean that a player can mount a credible objection to a continuation equilibrium in which he receives a particular expected present discounted value, if there are other self enforcing agreements that never give any player such a low continuation value after any history. This is formalized in a solution concept called consistent bargaining equilibrium.

Keywords: Repeated games, negotiation, bargaining theory, symmetric game, monitoring

JEL Classification: 026