On the Evolution of Pareto-Optimal Behavior in Repeated Coordination Problems.

I characterize the asymptotic behavior of a society facing a repeated-common-interest game. In this society, new individuals enter to replace their "parents" at random times. Each entrant has possibly different beliefs about others' behavior than his or her predecessor. A self-confirming equilibrium (SCE) belief process describes an evolution of beliefs in this society consistent with a self-confirming equilibrium of the repeated game. The main result shows that for any common-interest game, the Pareto-dominant equilibrium is a globally absorbing state of the behavioral dynamics when the SCE beliefs of new entrants satisfy certain independence and full-support properties. This result does not involve either of the usual assumptions of myopia or large inertia common in evolutionary models, nor is this result possible if only Nash rather than self-confirming equilibria are considered. Copyright 2000 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.