Can Subgame Perfect Equilibrium Threats Foster Cooperation? An Experimental Test of Finite‐Horizon Folk Theorems

Abstract

This paper considers extended prisoners' dilemma games in which a second pure strategy equilibrium in the stage game allows for mutual cooperation in all but the last round of the finitely repeated game as an equilibrium outcome. We distinguish a strict and a weak extension of the prisoners' dilemma game in a long and a short horizon treatment. A comparison with the corresponding finitely repeated prisoners' dilemma games shows that the strict additional equilibrium increases cooperation rates while the weak does not. This result is robust to the variation of the time horizon.

JEL Classification: C73, C91