Markov perfect equilibria for a class of capital accumulation games (Q1808163)

The authors formulate and solve a two-person discrete-time dynamic game in which performance indices have the form of discounted sums of profits maximized by the players. Single period net profits for each player depend on the player's own capital stock as well as the rival's one. In the paper two types of Markov perfect equilibria are discussed. The first type of equilibria called the strict ones are defined by constant investment strategies. Such equilibria are degenerate in the sense that the players determine their level of investment at the beginning of the game and play the same strategy in the whole planning interval. The second type of equilibria called the indifferent Markov perfect equilibria has the property that every response of the opponent is the best one to the equilibrium strategy of the player. The authors discuss general properties of the profit functions that ensure the existence of indifferent Markov perfect equilibrium. One important condition is that the profit functions of both players are additively separable in the capital stocks. The other problem studied in the paper deals with the dynamics of the equilibria. The authors show that while the capital accumulation game with additively separable profit functions always exhibits simple dynamics for the cooperative solution, the indifferent Markov perfect equilibria may result in complex dynamics.