High frequency repeated games with costly monitoring

Abstract

We study two-player discounted repeated games in which one player cannot monitor the other unless he pays a fixed amount. It is well known that in such a model the folk theorem holds when the monitoring cost is on the order of magnitude of the stage payoff. We analyze high frequency games in which the monitoring cost is small but still significantly higher than the stage payoff. We characterize the limit set of public perfect equilibrium payoffs as the monitoring cost tends to 0. It turns out that this set is typically a strict subset of the set of feasible and individually rational payoffs. In particular, there might be efficient and individually rational payoffs that cannot be sustained in equilibrium. We also make an interesting connection between games with costly monitoring and games played between long-lived and short-lived players. Finally, we show that the limit set of public perfect equilibrium payoffs coincides with the limit set of Nash equilibrium payoffs. This implies that our characterization applies also to sequential equilibria.

Early exclusion leads to cyclical cooperation in repeated group interactions

“…Inspired by the above-mentioned behavioural experiments, our mathematical model considers that excluders need to pay a permanent cost of monitoring to identify other players’ behaviours during the repeated group interaction process. Indeed, such monitoring cost also called opportunity cost in the previous work [65], has been used to describe the transparency between individuals in game interactions [66]. This realistic set-up makes our model more reasonable and brings a step closer towards understanding how social exclusion strategy works in the realistic case.…”