**Abstracts**

Trust in Risk Sharing: A Double-Edged Sword

Harold L. Cole, Dirk Krueger, George J. Mailath, and Yena Park

August 19, 2022

We analyze efficient risk-sharing arrangements when the value from deviating is determined endogenously by another risk sharing arrangement. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the original coalition and any coalition formed (joined) after deviations rely on a belief in future cooperation which we term “trust”. We treat the contracting conditions of original and deviation coalitions symmetrically and show that higher trust tightens incentive constraints since it facilitates the formation of deviating coalitions. As a consequence, although trust facilitates the initial formation of coalitions, the extent of risk sharing in successfully formed coalitions is declining in the extent of trust and efficient allocations might feature resource burning or utility burning: trust is indeed a double-edged sword.

Previous versions of this paper were circulated under the titles “Social Capital: A Double-Edged Sword” and “Coalition-Proof Risk Sharing Under Frictions.” The revision includes new theoretical results and a simple example illustrating those results.

The Wisdom of a Confused Crowd: Model-Based Inference

George J. Mailath and Larry Samuelson

January 16, 2019

“Crowds” are often regarded as “wiser” than individuals, and prediction markets are often regarded as effective methods for harnessing this wisdom. If the agents in prediction markets are Bayesians who share a common model and prior belief, then the no-trade theorem implies that we should see no trade in the market. But if the agents in the market are *not* Bayesians who share a common model and prior belief, then it is no longer obvious that the market outcome aggregates or conveys information. In this paper, we examine a stylized prediction market comprised of Bayesian agents whose inferences are based on different models of the underlying environment. We explore a basic tension—the differences in models that give rise to the possibility of trade generally preclude the possibility of perfect information aggregation.

A Foundation for Markov Equilibria in Infinite Horizon Perfect Information Games

V. Bhaskar, George J. Mailath, and Stephen Morris

October 29, 2012

We study perfect information games with an infinite horizon played by an arbitrary number of players. This class of games includes infinitely repeated perfect information games, repeated games with asynchronous moves, games with long and short run players, games with overlapping generations of players, and canonical non-cooperative models of bargaining. We consider two restrictions on equilibria. An equilibrium is *purifiable* if close by behavior is consistent with equilibrium when agents’ payoffs at each node are perturbed additively and independently. An equilibrium has *bounded recall* if there exists *K* such that at most one player’s strategy depends on what happened more than *K* periods earlier. We show that only Markov equilibria have bounded recall and are purifiable. Thus if a game has at most one long-run player, all purifiable equilibria are Markov. [This is essentially the January 5, 2010 version, with some typos corrected and two clarifications (the independence of payoff shocks across players made explicit and *K*-recall explicitly required in purifiability).]

Your Reputation Is Who You’re Not, Not Who You’d Like To Be

George J. Mailath and Larry Samuelson

August 7, 1998

We construct a model in which a firm’s reputation must be built gradually, is managed, and dissipates gradually unless appropriately maintained. Consumers purchase an experience good from a firm whose unobserved effort affects the probability distribution of consumer utilities. Consumers observe private, noisy signals (consumer utilities) of the behavior of the firm, yielding a game of *imperfect private monitoring*} The standard approach to reputations introduces some “good” or “Stackelberg” firms into the model, with consumers ignorant of the type of the firm they face and with ordinary firms acquiring their reputations by masquerading as Stackelberg firms. In contrast, the key ingredient of our reputation model is the continual possibility that the ordinary or “competent” firm might be replaced by a “bad” or “inept” firm who never chooses the Stackelberg action. Competent firms then acquire their reputations by convincing consumers that they are *not* inept. Building a reputation is an exercise in separating oneself from inept firms *who one is not*, rather than pooling with Stackelberg firms *who one would like to be*. We investigate how a firm manages such a reputation, showing, among other features, that a competent firm may not always choose the most efficient effort level to distinguish itself from an inept one.

Repeated Games with Imperfect Private Monitoring: Notes on a Coordination Perspective

George J. Mailath and Stephen Morris

July 3, 1998

In repeated games with imperfect public monitoring, players can use public signals to perfectly coordinate their behavior. Our study of repeated games with imperfect *private* monitoring focusses on the coordination problem that arises without public signals. We present three new observations. First, in a simple twice repeated game, we characterize the private signalling technologies that allow non-static Nash behavior in pure strategy equilibria. Our characterization uses the language of common *p*-belief due to Monderer and Samet (*GEB*, 1989). Second, we show that in the continuum action convention game of Shin and Williamson (*GEB*, 1996), for *any* full support private monitoring technology, equilibria of the finitely repeated convention game must involve only static Nash equilibria. By contrast, with sufficiently informative public monitoring, the multiplicity of Nash equilibria allows a finite folk theorem. Finally, for finite action games, we prove that there are full support private monitoring technologies for which a Nash reversion infinite horizon folk theorem holds.

A Reformulation of a Criticism of The Intuitive Criterion and Forward Induction

George J. Mailath

April 1988.

The intuitive criterion of Kreps has been criticized by Stiglitz (see Cho and Kreps (1987), Mailath, Okuno-Fujiwara, and Postlewaite (1993), and van Damme (1989)) for seeming inconsistencies in the way the reasoning is applied. Using the beer-quiche game as an example, this note recasts their criticism in a normal form argument which disputes the persuasiveness of the (naive) argument for not only the intuitive criterion, but also the requirement of robustness to elimination of never a weak best response (NWBR) strategies of Kohlberg and Mertens (1986)(a more general requirement which implies the intuitive criterion).

Updated February 15, 2017.