Endogenous Transfers in the Prisoner's Dilemma Game: An Experimental Test of Cooperation and Coordination

50 Pages Posted: 1 Jun 2006

See all articles by Gary Charness

Gary Charness

University of California, Santa Barbara (UCSB) - Department of Economics

Guillaume R. Frechette

New York University (NYU) - Department of Economics

Cheng-Zhong Qin

University of California, Santa Barbara (UCSB) - Department of Economics

Date Written: September 20, 2006

Abstract

We study experimentally a two-stage compensation mechanism for promoting cooperation in prisoner's dilemma games. In stage 1, players simultaneously choose binding non-negative amounts to pay their counterparts for cooperating in a given prisoner's dilemma game, and then play the prisoner's dilemma game in stage 2 with knowledge of these amounts. For the asymmetric prisoner's dilemma games we consider, all payment pairs consistent with mutual cooperation in subgame-perfect equilibrium transform these prisoner's dilemma games into coordination games, with both mutual cooperation and mutual defection as Nash equilibria in the stage-2 game. We find considerable empirical support for the mechanism, as cooperation is much more common when these endogenous transfer payments are feasible. We identify patterns among transfer pairs that affect the likelihood of cooperation. Mutual cooperation is most likely when the payments are identical; it is also substantially more likely with payment pairs that bring the payoffs from mutual cooperation closer together than with payment pairs that cause them to diverge. We also find that transfers are effective in sustaining cooperation even when they are imposed and not chosen.

Keywords: Prisoner's dilemma, Endogenous transfer payments, Compensation mechanism, Coase theorem, Coordination games, Equilibrium selection

JEL Classification: A13, B49, C72, C78, C91, K12

Suggested Citation

Charness, Gary and Frechette, Guillaume R. and Qin, Cheng-Zhong, Endogenous Transfers in the Prisoner's Dilemma Game: An Experimental Test of Cooperation and Coordination (September 20, 2006). Available at SSRN: https://ssrn.com/abstract=905024 or http://dx.doi.org/10.2139/ssrn.905024

Gary Charness (Contact Author)

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States
805-893-2412 (Phone)
805-893-8830 (Fax)

Guillaume R. Frechette

New York University (NYU) - Department of Economics ( email )

19 West Fourth St., 6th floor
New York, NY 10012
United States

HOME PAGE: http://https://files.nyu.edu/gf35/public/html/econ.htm

Cheng-Zhong Qin

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States

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