From the folk theorem of game theory, proved by Robert J. Aumann (1959) and James W. Friedman (A Non-cooperative Equilibrium for Supergames, 1971), extended by Drew Fudenberg and Eric Maskin (1986), and set out by Martin J. Osborne (An Introduction to Game Theory, 2004).
Shows how cooperation can hold between self-interested parties who expect to deal again, because the threat of future punishment outweighs a one-time gain from cheating.
When to reach for it
When a one-off view predicts defection but the relationship will run for years, as with suppliers, partners, or rivals sharing a market.
How it runs
- Write the payoffs for a single round.
- Choose the cooperative outcome to sustain.
- Define the response that punishes a deviation in later rounds.
- Check that future cooperation is worth more than the one-time gain.
Where it sits in SOLVE eX
Go to the source
- Acceptable Points in General Cooperative n-Person Games, Contributions to the Theory of Games IV, 1959
- A Non-cooperative Equilibrium for Supergames, 1971
- The Folk Theorem in Repeated Games with Discounting or with Incomplete Information, Econometrica 54, 1986
- An Introduction to Game Theory, chapter 14, 2004