CAREER: Economic Theory at Northwestern

Northwestern University, Evanston IL

Investigators

Abstract

This project consists of research and education in economic theory at Northwestern University. The research is an extension of my recent work on repeated games with private monitoring. This is an active area of research among game theorists with many open questions and few generally useful sets of analytical techniques. These are important games to analyze because they have many economically important applications. An often cited, but as yet unsolved, example is the secret price cutting game introduced by Stigler. While it is well-known how oligopolistic firms can sustain collusion when there is available a publicly observable statistic of past performance, it is an open question whether this sort of behavior survives as an equilibrium when information is private as in Stigler's model. In a recent paper, Juuso Valimaki and I have proven a version of the notorious "folk theorem" for the repeated Prisoner's Dilemma game with private monitoring. This result states that collusive outcomes can be sustained in equilibrium when the players are sufficiently patient and monitoring is good enough. In this proposal I show how the techniques used in that paper can be generalized to other games, including a standard model of duopoly. The collusive result extends to this duopoly model. This shows that our techniques have the potential to provide a general approach to repeated games. The research I propose is to develop these techniques and apply them to economic problems: One such problem is the Stigler model. Another set of problems is described in the proposal under the heading "Bad Reputations." The educational activities I propose are designed to promote graduate research in economic theory at Northwestern by stimulating student participation in the theory seminar series. I would like to organize and run a weekly research seminar in which students are required to critically read papers to be presented in the week's workshop, meet as a group to discuss the paper and prepare to be an informed participant in the actual seminar.