Correlated equilibrium under costly disobedience

Abstract

We extend Aumann's (1974) model of correlated equilibrium by requiring each player to bear an exogenously given cost if s/he disobeys the recommendation of the mediator. Calling the modified solution the costly correlated equilibrium (costly-CE), we show that in any finite normal-form game that has an unpure Nash equilibrium, the set of costly-CE strictly expands even with an arbitrarily small increase in the disobedience cost provided that the game is non-trivial and there is room for expansion. We also study the effects of the disobedience cost on the total welfare of players and the value of mediation. © 2021 Elsevier B.V.