DP4793 When the Punishment Must Fit the Crime: Remarks on the Failure of Simple Penal Codes in Extensive-Form Games

Author(s):	George J Mailath, Volker Nocke, Lucy White
Publication Date:	December 2004
Keyword(s):	optimal punishment, repeated extensive game, simple penal code, subgame perfect equilibrium
JEL(s):	C70, C72, C73
Programme Areas:	Industrial Organization
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=4793

In repeated normal-form games, simple penal codes (Abreu 1986, 1988) permit an elegant characterization of the set of subgame-perfect outcomes. We show that the logic of simple penal codes fails in repeated extensive-form games. We provide two examples illustrating that a subgame-perfect outcome may be supported only by a profile with the property that the continuation play after a deviation is tailored not only to the identity of the deviator, but also to the nature of the deviation.