Forgive but Don't Forget: How Players Navigate Repeated Games of Adverse Selection
In repeated games with hidden information, players may act in ways that seem unfriendly but actually signal changes in their private knowledge. Players forgive these actions but keep track of them, entering a punishment phase if they happen too often. This helps explain behaviors like price cuts, collusion, and sanctions in long-term relationships. Increasing the persistence of interactions can reduce misunderstandings.