Reputation effects in stochastic games with two long-lived players

This paper extends the reputation result of Evans and Thomas (Econometrica 65(5):1153–1173, 1997) to stochastic games. Specifically, I analyze reputation effects with two long-lived (but not equally long) players in stochastic games, that is, in games in which the payoffs depend on a state variable and the law of motion for states is a function of the current state and of the players’ actions. The results suggest that reputation effects in stochastic games can be expected if the uninformed player has a weak control of the law motion or if there is no irreversibility. On the contrary, in economic situations with irreversibility and in which the uninformed player’s strong control of the transition, such as the hold-up problems, reputation effects are unlikely to be obtained.