The present paper tries to explain cooperative behavior in an organization run by a sequence of long- but finitely-lived agents. The author shows that the Folk theorem holds for infinitely repeated games with overlapping generations of finitely-lived players; any mutually beneficial outcome can approximately be sustained if the player's life span and the overlapping periods are long enough. The result is stronger than the usual Folk theorems in that it employs no assumption on the stage game, such as the full dimensionality of payoff set or multiplicity of equilibria.

The present paper extends the theory of self-enforcing agreements in a long-term relationship (the Folk Theorem in repeated games) to the situation where agents change their partners over time. Cooperation is sustained because defection against one agent causes sanction by others, and the paper shows how such a “social norm” is sustained by self-interested agents under various degrees of observability. Two main results are presented. The first one is an example where a community can sustain cooperation even when each agent knows nothing more than his personal experience. The second shows a Folk Theorem that the community can realize any mutually beneficial outcomes when each agent carries a label such as reputation, membership, or licence, which are revised in a systematic way.

The present paper formalizes the idea that improved monitoring helps coordination in long term relationships. Specifically, the pure-strategy sequential equilibrium payoff set is shown to expand (in the sense of set inclusion) in repeated games with inperfect monitoring, when the quality of the signal improves in Blackwell's sense. Furthermore, the directions of the expansion are identified.