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  5. Noise-Tolerant Community Enforcement and the Strength of Small Stakes

Noise-Tolerant Community Enforcement and the Strength of Small Stakes

  • Drew Fudenberg
  • Alexander Wolitzky
American Economic Review: Insights (Forthcoming)

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 oneshot 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.

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