nr 070 - On Myopic Equilibria in Dynamic Games with Endogenous Discounting

DNB Working Papers
Date 21 December 2005

We derive a stationary equilibrium in a two-player multi-stage game with endogenous discounting. At each stage, the probability to reach the next stage is determined by the players’ current actions. We assume that the players are myopic in the sense that they take the future strategies of their opponents as given. We find that the stationary myopic equilibrium of the infinite-horizon multi-stage game corresponds to the infinite repetition of a Nash equilibrium of an induced (one-shot) limit game. Interestingly, this stationary myopic equilibrium is singled out when studying limiting equilibria of the associated multi-stage game with a finite horizon. Keywords: dynamic game, myopic equlibrium, discounting, equilibrium selection. JEL Code: C72, C73, G21