We investigate the finitely repeated prisoners' dilemma with explicit contractual devices.
We show that full collusion can be achieved by incentivizing the players' final period of play
with small fines. Our incentivizing modality is the penance contract, by which a player is
penalized if (and only if) he deviates from the penance strategy in the final period. We show that
using this contractual agreement brings the penance strategy profile into unique subgame perfect
equilibrium and achieves full collusion without being overturned by renegotiation. |