Compensation Principle in Repeated Games

Abstract A behavioral refinement of subgame perfect equilibria for repeated games is proposed. A temporal deviation-free equilibrium requires that an equilibrium should not assign an action profile from which a unilateral deviation can make all the players better off at that stage. We characterize the set of equilibrium payoffs and give a simple algorithm to find it. An extension of it, compensating equilibrium, requires that an equilibrium should leave no room for the possibility that a multishot unilateral deviation can make all the players better off. We partially characterize the equilibrium. Its relation to other refinement concepts is also discussed. Journal of Economic Literature Classification Numbers: C72, D74.