Emergence of Locally Suboptimal Behavior in Finitely Repeated Games

Abstract: We study the emergence of locally suboptimal behavior in finitely repeated games. Locally suboptimal behavior refers to players play suboptimally in some rounds of the repeated game (i.e., not maximizing their payoffs in those rounds) while maximizing their total payoffs in the whole repeated game. The central research question we aim to answer is when locally suboptimal behavior can arise from rational play in finitely repeated games. In this research, we focus on the emergence of locally suboptimal behavior in subgame-perfect equilibria (SPE) of finitely repeated games with complete information. We prove the first sufficient and necessary condition on the stage game G that ensure that, for all T and all subgame-perfect equilibria of the repeated game G(T), the strategy profile at every round of G(T) forms a Nash equilibrium of the stage game G. We prove the sufficient and necessary conditions for three cases: 1) only pure strategies are allowed, 2) the general case where mixed strategies are allowed, and 3) one player can only use pure strategies and the other player can use mixed strategies. Based on these results, we obtain complete characterizations on when allowing players to play mixed strategies will change whether local suboptimality can ever occur in some repeated game. Furthermore, we present an algorithm for the computational problem of, given an arbitrary stage game, deciding if locally suboptimal behavior can arise in the corresponding finitely repeated games. This addresses the practical side of the research question.