Class #12 Highlights

In this class, we learned about the theory of achieving coordination in repeated games. The idea is to combine carrots (promises of rewards for good behavior) with sticks (threats of punishment for bad behavior) to obtain cooperation.

This required: 

1. A payoff difference from the future consequences of bad versus good behavior. 

We saw that, when the game is only repeated twice or a small number of times, it was not possible to make credible promises to reward niceness in the last round of the game. As a consequence, good behavior breaks down. The lesson is that, as the endgame draws near, cooperation fails. 

2. Timely detection of bad behavior

We saw that, when an individual could get away with bad behavior for a couple of periods, sustaining cooperation became much more difficult. Likewise, delaying punishment also makes cooperation more difficult.

3. Proportional/Credible Punishments

If a punishment is so outrageous that the individual won't follow through, then it serves no role in getting good behavior. It must be credible that the punishment will be meted out. 

4. Forgiveness

Mistakes happen. An unforgiving punishment scheme suffers from two problems. It is disproportionate, so has credibility problems. It is also problematic since it cannot recover from errors. 

Together, these four keys allow for leveraging the future to achieve cooperation.