An observability paradox in linked enforcement

Abstract

The presence of observation errors limits players' ability to detect deviations, and hence the possibility of efficient cooperation in repeated games. When players interact repeatedly in multiple games with imperfect observation in at least one game, however, we find a novel spillover effect that enhances players' ability to sustain cooperation. This finding suggests the presence of observation error can increase the likelihood of efficient cooperation when players interact in multiple repeated games simultaneously. Our result has important implications for industrial organizations, relational contracts, and international cooperation.