MICRO/THEORY: Collusive Behaviour, Efficiency and Cheap Talk Negotiation in Repeated Games; Professor Hamid Sabourian (University of Cambridge)

Abstract

This paper addresses the relationship between cheap talk communication/negotiation and collusion/efficiency in repeated games by explicitly modelling the negotiation process. Specifically, we consider a standard infinitely repeated game of complete information with perfect monitoring satisfying the following: At each date, first players negotiate/bargain over how to play the infinite horizon continuation game and second, after the negotiation has ended, they play the stage game actions. Negotiation is cheap talk. We restrict the analysis to equilibria that are measurable with respect to players' latest agreement. The justification for this is that latest agreements are salient features of the past (they are focal points). We first show, for any discount factor, that (a) the equilibrium set a `babbling' equilibrium that induces a Nash equilibrium of the one-shot games, (b) no equilibrium payoff is Pareto dominated by a Nash equilibrium payoff of the one-shot game and (iii) the equilibrium payoff set is weakly renegotiation-proof (Bernhein-Ray 1987 and Farrell-Maskin 1987). We next show, in the limit as the discount factor tend to 1, that (i) every equilibrium payoff is either efficient or babbling and (ii) babbling equilibria correspond to playing a Nash equilibrium of the one-shot game if negotiation is costly and (iii)  efficient equilibria exist for many class of games.