Cooperation in Dynamic Games with Asymmetric Players: The Role of Social Preferences

I study a two-player repeated game where payoffs are asymmetric. Attempts to form cooperative agreements in such an environment, for example by pro-rating actions relative to the one-shot Nash equilibrium, have generally struggled in practice. I show that cooperative arrangements when payoff functions are asymmetric tend to disproportionately favor the larger player. Incorporating social concerns, either via envious feelings on the part of the smaller player or altruistic feelings on the part of the larger player, shift quasi-cooperative incentives toward outcomes that are more favorable to the smaller player.