Repeated Games & the Folk Theorem
How cooperation survives among the self-interested when the game never ends.
Definition
Games played over and over, where the shadow of the future can sustain cooperation that one-shot play destroys, formalized by the folk theorem.
Key equation
Cooperation sustainable if: gain from cheating โค discounted value of continued cooperation (ฮด high enough)
The intuition
Cheat your supplier once and win today; lose the relationship forever after. When players are patient and the game has no known end, strategies like grim trigger make honesty self-enforcing, the mechanism behind cartels, credit, and reputations.
Exam tip
Finite known horizons unravel by backward induction, cooperation needs an infinite or uncertain end date.
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