TY - JOUR
T1 - Endogenous transfers in the Prisoner's Dilemma game
T2 - An experimental test of cooperation and coordination
AU - Charness, Gary
AU - Fréchette, Guillaume R.
AU - Qin, Cheng Zhong
N1 - Funding Information:
We thank Eric Maskin, Tom Palfrey, Catherine Weinberger, and seminar participants at the Institute for Advanced Study in Princeton and at Ben-Gurion University for helpful comments. All errors are our own. Charness and Qin gratefully acknowledge the financial support from the UCSB Academic Senate. Fréchette's research was partially supported by the Center for Experimental Social Science, the C.V. Starr Center and the National Science Foundation (Grant SES-0519045).
PY - 2007/8
Y1 - 2007/8
N2 - 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.
AB - 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.
KW - Coase theorem
KW - Compensation mechanism
KW - Coordination games
KW - Endogenous transfer payments
KW - Equilibrium selection
KW - Prisoner's dilemma
UR - http://www.scopus.com/inward/record.url?scp=34447252363&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=34447252363&partnerID=8YFLogxK
U2 - 10.1016/j.geb.2006.10.010
DO - 10.1016/j.geb.2006.10.010
M3 - Article
AN - SCOPUS:34447252363
SN - 0899-8256
VL - 60
SP - 287
EP - 306
JO - Games and Economic Behavior
JF - Games and Economic Behavior
IS - 2
ER -