Endogenous transfers in the Prisoner's Dilemma game: An experimental test of cooperation and coordination

Gary Charness, Guillaume R. Fréchette, Cheng Zhong Qin

    Research output: Contribution to journalArticlepeer-review

    Abstract

    We test a two-stage compensation mechanism for promoting cooperation in Prisoner's Dilemma games. Players first simultaneously choose binding non-negative amounts to pay their counterparts for cooperating, and then play the induced game knowing these amounts. In our games, all payment pairs consistent with mutual cooperation in subgame-perfect equilibrium transform these games into coordination games, with both mutual cooperation and mutual defection as Nash equilibria in the second stage. When endogenous transfer payments are not permitted, cooperation is much less likely. Mutual cooperation is most likely when the (sufficient) payments are identical, and it is also substantially more likely with payment pairs that bring the mutual-cooperation payoffs closer together. Both the Fehr-Schmidt and Charness-Rabin models predict that transfers that make final payoffs closer are preferred; however, they do not explain why equal transfers are particularly effective. Transfers are also effective in sustaining cooperation even when they are imposed and not chosen.

    Original languageEnglish (US)
    Pages (from-to)287-306
    Number of pages20
    JournalGames and Economic Behavior
    Volume60
    Issue number2
    DOIs
    StatePublished - Aug 2007

    Keywords

    • Coase theorem
    • Compensation mechanism
    • Coordination games
    • Endogenous transfer payments
    • Equilibrium selection
    • Prisoner's dilemma

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

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