Definition of The Folk Theorem: The folk theorem is theorem is that a Nash equilibrium exists in repeated games in which sufficiently patient players to reach Pareto optimal payoffs in a Nash equilibrium.

The strategies that achieve this often have the pattern that they 'punish' the other player at length for any defection from the Pareto optimal choice. In equilibrium that encourages the other player not to defect for a short term gain. (Econterms)

Terms related to The Folk Theorem:

• Pareto optimal
• Repeated games