David K. Levine
August 5, 1998
Abstract:A simple example of a stochastic game with irreversibility is studied and it is shown that the folk theorem fails in a robust way. In this game of Castle on the Hill, for a broad range of discount factors, including those close to one, equilibrium is unique. Moreover, the equilibrium for large discount factors is Pareto dominated by the equilibrium for low discount factors. A unique cyclic equilibrium is also possible for intermediate ranges of discount factors.