Micro Economics
Part 2 Backwards Induction
Sarah and Mark play the repeated Prisoner’s Dilemma for exactly N periods.
Explain why the subgame perfect equilibrium is for both to defect every period whatever the value of
When Sarah and Mark play this game with N = 2 they play the subgame perfect However, when they play with N = 1000, they both start off cooperating and both defect for the first time in period 998 and then defect for the remaining two periods. How would you explain their play? What do you predict will happen if they play with N = 1000 a second time?
Search the literature for papers that relate to the finitely repeated prisoner’s dilemma and the backwards induction solution which is to defect every period.
Summarise one or more of the papers you find. If it is one paper give a more detailed summary and if it is more than one, compare and contrast them. (A reminder that in the class exam information e-mail you were guided to have a minimum of 500 words for this part).
