Renegotiation in Repeated Games

The huge multiplicity of equilibria given by the folk theorem motivates an obvious question: why would players “deliberately” select on equilibria with bad outcomes if “better” equilibria are available? A simple answer to this is that individual rationality (along with the common knowledge of the game and strategic beliefs) does not take us further than equilibrium behavior. In particular, it does not permit us to choose among equilibria on the basis of collective rationality.