A THEORY OF FORWARD INDUCTION IN FINITELY REPEATED GAMES

A forward induction solution for finitely repeated games with complete information is developed. This notion is motivated in terms of its im plications on the way deviations affect the opponents' expectations ab out the future behavior of the deviating player. We argue that the ina bility of the notion of perfect equilibrium to take account of forward induction is a key factor responsible for a number of difficulties en countered in the use of perfect equilibria in repeated games. It is th en shown that the solution proposed in this paper remedies some of the se problems in the study of three important classes of repeated games: (i) finitely repeated coordination games; (ii) repeated games where o ne long-term player plays a sequence of short-term players; (iii) repe ated battle of the sexes games.