Collusive behaviour in finite repeated games with bonding

Abstract

In finite repeated games, it is not possible to enforce collusive behaviour using deterrent strategies because of the "unraveling" of cooperative behaviour in the last period. This paper demonstrates that under certain conditions collusion 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 bond required to deter defection becomes arbitrarily small as the number of periods in the game increases.