Flexibility and Reputation in Repeated Prisoners' Dilemma Games

32 Pages Posted: 10 Feb 2015

See all articles by Dorothee Honhon

Dorothee Honhon

University of Texas at Dallas

Kyle B. Hyndman

University of Texas at Dallas

Date Written: February 9, 2015

Abstract

We study the role that the option to terminate a relationship has on cooperation in a repeated prisoner's dilemma. While cooperation is, in theory, sustainable with or without this option, we show experimentally that cooperation rates are significantly lower with the option to terminate. Rather than punishing a defection, most subjects choose to terminate the relationship, which increases the temptation to behave opportunistically. However, we show that introducing a reputation mechanism, through which signals of past cooperative behavior are given to future matches, can substantially increase cooperation rates, in some cases to a level higher than when the option to terminate the relationship is absent. Our results show that an objective, long-lasting measure of reputation is the most effective in promoting cooperation, but short-lasting or subjective but long-lasting reputation mechanisms also increase cooperative behavior. Moreover, reputation mechanisms generally lead to stable cooperation rates over time, in contrast to the declining cooperation rates observed in their absence when subjects are free to terminate relationships. Finally we show that the option to terminate a relationship acts as a sorting mechanism between subjects who cooperate frequently and those who do not, and that reputation mechanisms further enhance this sorting effect.

Keywords: Long-term relationships, prisoners' dilemma, reputation, experiment

JEL Classification: C72, C91, D83

Suggested Citation

Honhon, Dorothee and Hyndman, Kyle B., Flexibility and Reputation in Repeated Prisoners' Dilemma Games (February 9, 2015). Available at SSRN: https://ssrn.com/abstract=2562727 or http://dx.doi.org/10.2139/ssrn.2562727

Dorothee Honhon

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Kyle B. Hyndman (Contact Author)

University of Texas at Dallas ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

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