Trust off the equilibrium path

Reference no: EM131252570

Trust Off the Equilibrium Path: Recall the trust game depicted in Figure. We argued that for δ ≥ 1/2 the following pair of strategies is a sub game perfect equilibrium.

For player 1: "In period 1 I will trust player 2, and as long as there were no deviations from the pair (T, C) in any period, then I will continue to trust him. Once such a deviation occurs then I will not trust him forever after."

For player 2: "In period 1 I will cooperate, and as long as there were no deviations from the pair (T, C) in any period, then I will continue to do so.

Once such a deviation occurs then I will deviate forever after." Show that if instead player 2 uses the strategy "as long as player 1 trusts me I will cooperate" then the path (T, C) played forever is a Nash equilibrium for δ ≥ 1/2 but is not a subgame-perfect equilibrium for any value of δ.

1242_Fig 04.jpg

Reference no: EM131252570

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