Collusive behaviour in finite repeated games with bonding

Abstract

In finite repeated games, it is not possible to enforce collusive behaviour using deterrent strategies if the state game has a unique Nash equilibrium, because of the 'unravelling' of cooperative behaviour in the last period. This paper demonstrates that under certain conditions, some cooperation among the players can be maintained if they can post a bond which they must forfeit if they defect from the cooperative mode. We show that the incentives to cooperate increase as the period of interaction grows in that the size of the bonds required to deter defection become arbitrarily small as the number of periods in the game increases.

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