COLLUSION, DISCOUNTING AND DYNAMIC-GAMES

This paper investigates the following claims: in a dynamic game, (i) Pareto-optimal outcomes are sustainable only by patient players and (ii) the set of equilibrium outcomes expands in the discount factor. The intuition for these results, although immediate for purely repeated games, is shown to be incomplete for dynamic games. Consequently, there is no direct link between patience and the sustainability of Pareto-optimal outcomes. In fact, there are dynamic games arbitrarily ''close'' to a repeated game in which such collusion is facilitated by impatience. However, for a class of dynamic games, any equilibrium outcome that is sustainable by less patient players is also an equilibrium outcome when players are more patient. Journal of Economic Literature Classification Numbers: C73, D90. (C) 1995 Academic Press, Inc.