REPUTATION AND EXPERIMENTATION IN REPEATED GAMES WITH 2 LONG-RUN PLAYERS

This paper considers reputation effects in a repeated game between two long-run players, one of whom is relatively patient and may be commit ted to a fixed strategy which punishes the opponent for increasingly l ong periods whenever inappropriate actions are taken. By following thi s commitment strategy, the more patient player can induce a sufficient ly patient opponent to experiment to see whether the commitment strate gy is also being followed off the equilibrium path. This can guarantee the more patient player (in any Nash equilibrium) a payoff close to t he highest feasible payoff consistent with the individual rationality of the other player. For an arbitrary degree of patience of the less p atient player a weaker result is established: the more patient player is guaranteed an average equilibrium payoff close to the static Stacke lberg payoff. This latter result generalizes that of Schmidt (1993), w ho established the same result for the restricted class of games of co nflicting interests.