Organizations and Overlapping Generations Games: Memory, Communication, and Altruism

This paper studies the role of memory and communication in overlapping generations (OLG) games between ongoing organizations. In each organization, each individual, upon entry into the game, replaces his predecessor who has the same preferences and faces the same strategic possibilities. An individual has no prior memory - that is, he does not directly witness the events that occur before his tenure. Instead, each individual relies on information about the past from his predecessor via cheap talk. This paper highlights the role of communication as a surrogate for memory. It has been shown elsewhere that Folk Theorems hold in OLG games with long enough lived individuals who can perfectly observe the past. However, the Folk Theorem fails for many games when individuals have no prior memory. We show that for OLG games without prior memory but with costly communication, a Folk Theorem holds only when there is some altruistic link between cohorts in an organization. Our main result asserts that if communication costs are sufficiently small, or if altruistic weights on successors are sufficiently large, then a strongly stationary Folk Theorem (i.e., equilibrium payoffs are time invariant) obtains if a manager’s message is public information. The equilibria in this Folk Theorem require a special form of intergenerational sanctions. In these sanctions, punishment is sometimes carried out long after both victim and perpetrator have left the game. Without this special structure, altruism may in fact destroy cooperation when it would otherwise be possible. Copyright Springer-Verlag Berlin/Heidelberg 2004