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Noise-Tolerant Community Enforcement and the Strength of Small Stakes

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  • Drew Fudenberg
  • Alexander Wolitzky

Abstract

We study community enforcement in a large population with noisy monitoring. We focus on equilibria in the prisoner's dilemma that are coordination proof, meaning that matched partners never play a Pareto-dominated Nash equilibrium in the one-shot game induced by the equilibrium continuation payoffs at their current histories. We show that a noise-tolerant version of contagion strategies is optimal among all coordination-proof equilibria. Welfare under tolerant contagion strategies decreases in the noise level and the gain from defection faster than welfare in a fixed partnership does. Thus, community enforcement has a comparative advantage in supporting "low-stakes" relationships.

Suggested Citation

  • Drew Fudenberg & Alexander Wolitzky, 2024. "Noise-Tolerant Community Enforcement and the Strength of Small Stakes," American Economic Review: Insights, American Economic Association, vol. 6(4), pages 509-525, December.
  • Handle: RePEc:aea:aerins:v:6:y:2024:i:4:p:509-25
    DOI: 10.1257/aeri.20230617
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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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