Saddle Point

Chapter 3 · begins on page 105

Bargaining, Commitment, and Repeated Cooperation

The bound handshake back to it on the cover
Try it yourself The forgiving trigger How patient must two sides be for cooperation to survive noisy monitoring? Open the engine →

The models

Each model in the book is stated on one card: who decides, when, with what information and commitment, what they get, what they may do, and the question it answers.

Model B1 · p. 127

How is the surplus divided, and how much does the right to propose first matter?

Model B1 · Chapter 3 · page 127

How is the surplus divided, and how much does the right to propose first matter?

Alternating offers; Model B1


1Decision-makers
two bargainers
2Time
discrete periods, unbounded (or periods); offers alternate
3Information
complete and perfect: everyone sees every offer and response
4Commitment
none: an offer binds only if accepted; a rejected offer can be followed by any other
5Payoffs
discounted shares; impatience
6Strategies
offer and acceptance rules depending on the whole history

The analysis contract

(i) concept
subgame-perfect equilibrium
(ii) deviations
all offers and responses in every subgame
(iii) beliefs
none needed
(iv) selection
none: the equilibrium is unique; an indifferent responder accepts
(v) attainment
attained; exact; finite truncations converge with a proved error bound
In the book: Chapter 3, Bargaining, Commitment, and Repeated Cooperation, page 127

Model B2 · p. 128

Does private information prevent agreement, and does the inability to commit help or hurt?

Model B2 · Chapter 3 · page 128

Does private information prevent agreement, and does the inability to commit help or hurt?

A privately informed responder; Model B2


1Decision-makers
proposer and responder (two types)
2Time
one offer, or two offers in sequence
3Information
the responder knows its value; the proposer knows only the prior
4Commitment
with commitment, a first offer is also the last; without, a rejection is followed by a new offer
5Payoffs
the price for the proposer; value minus price for the responder; discount between offers
6Strategies
prices; acceptance rules by type, possibly mixed

The analysis contract

(i) concept
perfect Bayesian equilibrium
(ii) deviations
every first offer (checked on a grid of prices up to ); every response by each type
(iii) beliefs
Bayes' rule wherever it applies after every first offer; beliefs after zero-probability events are not pinned down
(iv) selection
a responder indifferent between accepting and waiting is allowed to mix; an indifferent low type accepts ; at the two boundary first offers the high type's acceptance probability is a family, and the optimum selects its upper endpoint
(v) attainment
attained; exact; all on-path outcomes and all essential continuations, not a unique assessment
In the book: Chapter 3, Bargaining, Commitment, and Repeated Cooperation, page 128

Model B3 · p. 131

When can cooperation be sustained without an enforcer?

Model B3 · Chapter 3 · page 131

When can cooperation be sustained without an enforcer?

Repeated prisoner's dilemma; Model B3


1Decision-makers
two players
2Time
infinitely repeated; common discount factor
3Information
perfect monitoring: past actions are observed
4Commitment
none: cooperation must be self-enforcing
5Payoffs
normalised discounted sums of stage payoffs
6Strategies
maps from histories to actions; public randomisation allowed

The analysis contract

(i) concept
subgame-perfect equilibrium
(ii) deviations
one-shot deviations suffice (discounting)
(iii) beliefs
none needed
(iv) selection
none; the set of equilibrium payoffs is described
(v) attainment
attained
In the book: Chapter 3, Bargaining, Commitment, and Repeated Cooperation, page 131

Model B4 · p. 132

What does noisy monitoring cost, and how should punishments be calibrated?

Model B4 · Chapter 3 · page 132

What does noisy monitoring cost, and how should punishments be calibrated?

Noisy public monitoring; Model B4


1Decision-makers
two players
2Time
infinitely repeated; discount
3Information
imperfect public monitoring: only the signal and the lottery are seen
4Commitment
none
5Payoffs
as in Model B3
6Strategies
the class of trigger profiles with forgiveness, indexed by

The analysis contract

(i) concept
perfect public equilibrium within the stated class
(ii) deviations
one-shot deviations from cooperation (mutual defection is a stage equilibrium)
(iii) beliefs
public signals only
(iv) selection
the incentive-compatible with the highest value
(v) attainment
attained; exact; optimality is within the class only
In the book: Chapter 3, Bargaining, Commitment, and Repeated Cooperation, page 132Run this model →

Model B5 · p. 134

Can an agreement made at the start be kept at every later date?

Model B5 · Chapter 3 · page 134

Can an agreement made at the start be kept at every later date?

A two-stage agreement; Model B5


1Decision-makers
two parties to an agreement
2Time
two stages
3Information
complete
4Commitment
the agreement binds only as long as each party's remaining share is at least what it can get by leaving
5Payoffs
transferable; disagreement values given at each stage
6Strategies
payment schedules that implement the agreed shares

The analysis contract

(i) concept
time consistency of the cooperative solution (Petrosyan): an imputation distribution procedure spreads the chosen imputation over time; time consistency adds that the remaining payments equal the solution of the remaining game, which in two stages gives the difference formula used here
(ii) deviations
leaving the agreement at the start of either stage
(iii) beliefs
none needed
(iv) selection
the symmetric Nash bargaining solution at each stage
(v) attainment
exact
In the book: Chapter 3, Bargaining, Commitment, and Repeated Cooperation, page 134

Model B6 · p. 136

How much of its information should the informed player use, and when?

Model B6 · Chapter 3 · page 136

How much of its information should the informed player use, and when?

Lack of information on one side; Model B6


1Decision-makers
informed maximiser, uninformed minimiser
2Time
infinitely repeated, long-run average payoffs
3Information
one-sided: only player 1 knows the state; actions are observed
4Commitment
none
5Payoffs
zero-sum
6Strategies
behaviour strategies depending on the state (player 1) and on the history

The analysis contract

(i) concept
value of the infinitely repeated game (uniform value)
(ii) deviations
all strategies
(iii) beliefs
the uninformed player's posterior, computed from player 1's state-dependent strategy
(iv) selection
none (zero-sum)
(v) attainment
the value is (Aumann–Maschler theorem, cited); , and the one-shot values are computed exactly
In the book: Chapter 3, Bargaining, Commitment, and Repeated Cooperation, page 136

What is proved, in words

The book follows each result with one sentence that says what it means without symbols. The formal statement is a click away; the proofs are in the book.

Proposition 3.2 · Rubinstein's division · p. 128

With no deadline and complete information, bargainers agree at once, and what decides the division is impatience: each side concedes exactly what one round of delay would cost it, and a distant deadline changes almost nothing.

Proposition 3.2 · Chapter 3 · page 128

Rubinstein's division

In words With no deadline and complete information, bargainers agree at once, and what decides the division is impatience: each side concedes exactly what one round of delay would cost it, and a distant deadline changes almost nothing.


The game has a unique subgame-perfect equilibrium. Agreement is immediate, and the proposer obtains , where is the responder: at the base values player 1 obtains when it proposes first and player 2 obtains when it does. In the -period game the first proposer's equilibrium share satisfies . With , player 1's share as first proposer is , which decreases to as : the division of the asymmetric Nash bargaining solution with weights .

The proof is in the book: Chapter 3, Bargaining, Commitment, and Repeated Cooperation, page 128

Proposition 3.4 · Commitment, breakdown and delay · p. 129

When the responder knows its own value, a proposer who can commit prices the low type out and accepts breakdown; without commitment, a second offer rescues every deal only for an impatient proposer (), while a patient one holds out and some deals both sides want are never made; at both, and mixtures of them, are optimal.

Proposition 3.4 · Chapter 3 · page 129

Commitment, breakdown and delay

In words When the responder knows its own value, a proposer who can commit prices the low type out and accepts breakdown; without commitment, a second offer rescues every deal only for an impatient proposer (), while a patient one holds out and some deals both sides want are never made; at both, and mixtures of them, are optimal.


With commitment the proposer asks , earns , and agreement fails with probability ; the total surplus is against if every deal were made. With two offers and , write .

  • After a first offer both types accept and the proposer earns . After the high type accepts at once and the low type buys at next; the proposer earns .
  • At the boundary the high type's probability of accepting at once can be anything in (the last price is then ); the proposer earns .

After the high type accepts with probability , which leaves the belief at after a rejection; the proposer then asks with probability , keeping the high type indifferent, and earns .

At , can be anything in (last price ), and the proposer earns .

Above both types reject and the proposer earns .

  • The proposer screens (at , with : ) if and holds out (at , with : ) if ; for , at the optimum the upper endpoint of each boundary family is forced, since otherwise a nearby price in the adjacent open interval would do better (at every at earns the same ). At both first offers ( and ) are optimal, earning , with total surplus and respectively, and any mixture of the two is also an equilibrium. At the proposer asks twice and earns ; half the high types buy at once and half after a delay; the low type never trades; the total surplus is , below the of the committed offer.
The proof is in the book: Chapter 3, Bargaining, Commitment, and Repeated Cooperation, page 129

Proposition 3.7 · Grim trigger and the folk theorem · p. 131

If the future matters enough, cooperation is held together by the threat of reverting to mutual defection, and then, for players patient enough, every feasible payoff pair that gives each side more than mutual defection can be sustained: repetition creates many self-enforcing agreements but does not choose among them.

Proposition 3.7 · Chapter 3 · page 131

Grim trigger and the folk theorem

In words If the future matters enough, cooperation is held together by the threat of reverting to mutual defection, and then, for players patient enough, every feasible payoff pair that gives each side more than mutual defection can be sustained: repetition creates many self-enforcing agreements but does not choose among them.


Mutual cooperation, enforced by permanent mutual defection after any defection, is a subgame-perfect equilibrium if and only if . Every payoff pair that is achievable by some distribution of stage outcomes and gives each player strictly more than its minmax value is a subgame-perfect equilibrium payoff for all close enough to .

The proof is in the book: Chapter 3, Bargaining, Commitment, and Repeated Cooperation, page 131

Proposition 3.9 · The price of noisy monitoring · p. 133

When defection is seen only through a noisy signal, punishment must sometimes fall on the innocent; the best forgiving trigger punishes as rarely as incentives allow, and its loss against perfect monitoring depends on the quality of the signal, not on patience.

Proposition 3.9 · Chapter 3 · page 133

The price of noisy monitoring

In words When defection is seen only through a noisy signal, punishment must sometimes fall on the innocent; the best forgiving trigger punishes as rarely as incentives allow, and its loss against perfect monitoring depends on the quality of the signal, not on patience.


Let . If , no profile in the class sustains cooperation. If , cooperation is sustained if and only if ; the best profile uses the smallest incentive-compatible punishment probability, , and gives each player

whatever . At the base values , , and , against under perfect monitoring; cooperation of this kind is impossible once .

The proof is in the book: Chapter 3, Bargaining, Commitment, and Repeated Cooperation, page 133

Proposition 3.10 · is the best strongly symmetric equilibrium · p. 133

At the base signal, no strongly symmetric equilibrium — both sides using the same public strategy, mixing independently, with public lotteries — beats the simple forgiving trigger: is a ceiling in that class set by the signal, reached once . At other signals the trigger value can be beaten (Section 3.7 (p. 117)).

Proposition 3.10 · Chapter 3 · page 133

is the best strongly symmetric equilibrium

In words At the base signal, no strongly symmetric equilibrium — both sides using the same public strategy, mixing independently, with public lotteries — beats the simple forgiving trigger: is a ceiling in that class set by the signal, reached once . At other signals the trigger value can be beaten (Section 3.7 (p. 117)).


In Model B4, consider perfect public equilibria in which both players use the same strategy after every public history, randomising independently, with public lotteries allowed. For every and every probability of a good signal after mutual defection, no such equilibrium gives a player more than . For the trigger profile of Proposition 3.9 (p. 133) attains it, so the optimality of extends from the trigger class to the whole strongly symmetric class.

The proof is in the book: Chapter 3, Bargaining, Commitment, and Repeated Cooperation, page 133

Proposition 3.12 · Time consistency of the recomputed solution may require payments in advance · p. 135

If an agreement's terms are recomputed from the parties' current outside options at every date, a party whose options improve later must be given its larger share then, and the books may balance only if it pays in advance; an agreement that only has to keep each party willing to stay need not require this.

Proposition 3.12 · Chapter 3 · page 135

Time consistency of the recomputed solution may require payments in advance

In words If an agreement's terms are recomputed from the parties' current outside options at every date, a party whose options improve later must be given its larger share then, and the books may balance only if it pays in advance; an agreement that only has to keep each party willing to stay need not require this.


The agreed shares are at the start and of what remains at the second stage. The unique schedule that pays out the agreed shares and leaves each party, at the second stage, exactly the solution of the remaining game — Petrosyan's imputation distribution procedure — pays in the first stage and in the second: player 2 must pay at the start. The naive schedule that splits each stage's payoff equally gives player 2 in the second stage, less than the it can get by leaving. If player 2's second-stage disagreement value is instead, the time-consistent payments are and , all nonnegative. Participation alone does not force the advance payment: with the original outside options the nonnegative schedule then pays the totals and leaves both parties above their second-stage outside options (, ). What it violates is time consistency: its second-stage payment is not the recomputed Nash solution .

The proof is in the book: Chapter 3, Bargaining, Commitment, and Repeated Cooperation, page 135

Proposition 3.14 · Use part of the information · p. 137

In this repeated zero-sum game, the informed player should use its information only partly: reveal a little once, then play as if uninformed. That secures more in the long run than hiding everything or revealing everything, although in a single round full use would be best.

Proposition 3.14 · Chapter 3 · page 137

Use part of the information

In words In this repeated zero-sum game, the informed player should use its information only partly: reveal a little once, then play as if uninformed. That secures more in the long run than hiding everything or revealing everything, although in a single round full use would be best.


is piecewise linear with kinks at , with and ; hence . Player 1 guarantees a long-run average of by a one-time signal that moves the uninformed player's belief to or , each with probability , and by then playing optimally in the corresponding average game; ignoring the information gives , and so does revealing the state, after which the game at belief or is worth . In a single round, using the information fully is worth : the informed player's unique optimal plan is the top row in state 1 and the bottom row in state 2, and the minimiser may use any mixture of its three columns. Over rounds the splitting strategy loses at most a first-round amount, so its average falls short of by , not by zero. By the Aumann–Maschler theorem the value of the infinitely repeated game is .

The proof is in the book: Chapter 3, Bargaining, Commitment, and Repeated Cooperation, page 137

The worked case

A parallax in history

1911 · Chapter 3 · p. 123

Paying for restraint: the fur seal convention

Then

Fur seal convention, 1911: restraint paid in skins, compliance shown by a mark

Now

Oil price cap coalition, from 2022: compliance read from attestations and voyage data (Section 3.7 (p. 117))

1911 · Chapter 3 · page 123

Paying for restraint: the fur seal convention

Then

Fur seal convention, 1911: restraint paid in skins, compliance shown by a mark

Now

Oil price cap coalition, from 2022: compliance read from attestations and voyage data (Section 3.7 (p. 117))


What happened

On 7 July 1911 the United States, Great Britain, Japan and Russia signed at Washington a convention for the protection of the fur seals of the North Pacific, in force from 15 December 1911 D [United States Department of State 1911]. Article I prohibited their nationals and vessels from pelagic sealing (taking seals at sea) north of the thirtieth parallel, and allowed an offending vessel to be seized. Article III barred the import of skins taken in that area unless taken under the authority of the government owning the breeding grounds and officially marked and certified; Article VII had the United States, Japan and Russia each keep a patrol. Article X had the United States deliver each season, at the Pribilof Islands, fifteen per cent “gross in number and value” of the skins taken under its authority to an agent of the Canadian government and fifteen per cent to an agent of the Japanese government; Article XII made the same provision for Russia's take on the Commander Islands. Article IV exempted aborigines sealing from canoes, without firearms and not employed by others D [United States Department of State 1911, Articles I, III, IV, VII, X, XII, XVI].

The model

The worked case keeps apart two tasks that this treaty joined R. Field 5: the parties that gave up sealing at sea were paid in kind, every season, from the land harvest they had agreed to leave alone, in shares fixed in the text rather than left to goodwill; whether that made staying in better than each party's outside option the text cannot show, since it states no payoffs. Fields 3 and 6: the mark, the certificate, the import ban and the patrol made lawful activity recognisable, so that an unmarked skin was evidence in itself. In Model B4's terms the first task sets against , the second and .

What could be known

In 1911 the signal of compliance was slow and expensive (a patrol on the grounds, an inspection at the port, one season at a time) but nearly binary where it existed: a skin carried the mark or it did not. The coalition of this section observes compliance through documents and voyage data: continuous, fast, cheap to produce and for that reason cheap to produce falsely, which in Model B4 moves towards . Faster observation shortened the delay; it did not restore the discreteness of the evidence. And the compensation of 1911 was specified in the text, as skins delivered at a named place each season, which made the payment side an auditable obligation but not one free of monitoring: the skins still had to be counted and valued, and Article XI provided advances, minimum deliveries and an umpire for disputes over their market value D [United States Department of State 1911, Article XI].

Where the parallel stops

Four parties, one species and a colonial legal order with a restricted exemption for aboriginal sealing; the shares of skins transfer to no other agreement, and nothing in the treaty is a parameter of Model B4.

In the book: Chapter 3, page 123All sixteen parallaxes on the timeline →

The people

Chapter 3 · Bargaining, Commitment, and Repeated Cooperation

John F. Nash Jr.

1928 – 2015

Mathematician who studied at the Carnegie Institute of Technology and received his doctorate from Princeton in 1950 with a thesis on non-cooperative games. He taught at the Massachusetts Institute of Technology and later worked at Princeton. He introduced the equilibrium concept that bears his name and an axiomatic solution of the bargaining problem, and proved fundamental results in differential geometry and partial differential equations. He shared the 1994 Nobel Memorial Prize in Economic Sciences with John Harsanyi and Reinhard Selten, and the 2015 Abel Prize with Louis Nirenberg.

The life, in moments →

Main works

  • “The bargaining problem” (Econometrica 18, 1950)
  • “Non-cooperative games” (Annals of Mathematics 54, 1951)
  • “Two-person cooperative games” (Econometrica 21, 1953)
  • “The imbedding problem for Riemannian manifolds” (Annals of Mathematics 63, 1956)

Chapter 3 · Bargaining, Commitment, and Repeated Cooperation

Leon A. Petrosyan

born 1940

Mathematician at Leningrad, later Saint Petersburg, State University, where he long led the Faculty of Applied Mathematics and Control Processes and its department of game theory and statistical decisions. He worked on differential games of pursuit and on dynamic cooperative games, and introduced the requirement that a cooperative solution be time-consistent, together with the imputation distribution procedure that implements it.

The life, in moments →

Main works

  • “Stability of solutions in differential games with many participants” (in Russian, Vestnik Leningrad University, 1977)
  • Differential Games of Pursuit (1993)
  • Cooperative Stochastic Differential Games, with D. W. K. Yeung (2006)

Chapter 3 · Bargaining, Commitment, and Repeated Cooperation

Robert J. Aumann

born 1930

Mathematician who received his doctorate from the Massachusetts Institute of Technology in 1955 and has worked since 1956 at the Hebrew University of Jerusalem, where he was a founding member of the Center for the Study of Rationality. He developed the theory of repeated games, including games with incomplete information with Michael Maschler, introduced correlated equilibrium, and formalised common knowledge. He shared the 2005 Nobel Memorial Prize in Economic Sciences with Thomas Schelling.

The life, in moments →

Main works

  • “Subjectivity and correlation in randomized strategies” (Journal of Mathematical Economics 1, 1974)
  • “Agreeing to disagree” (Annals of Statistics 4, 1976)
  • Repeated Games with Incomplete Information, with M. Maschler (1995)