p.1173

Repeated Principal-Agent Games with Discounting

Roy Radner

Abstract

In a repeated principal-agent game (supergame) in which each player's criterion is his long-run average expected utility, efficient behavior can be sustained by a Nash equilibrium if it is pareto-superior to a one-period Nash equilibrium. Furthermore, if the players discount future expected utilities, then for every positive epsilon, and every pair of discount factors sufficiently close to unity (given epsilon), there exists a supergame equilibrium that is within epsilon (in normalized discounted expected utility) of the target efficient behavior. These supergame equilibria are explicitly constructed with simple "review strategies."