Bonding by guilt: A resolution of the finite horizon prisoners’ dilemma

This paper proposes an intuitive, guilt-based dynamic resolution of the prisoners’ dilemma with a finite horizon by viewing cooperation as generating a “stock of potential guilt” (SPG) that actuates upon defection, turning into realized guilt-cost. A player’s SPG is a state variable that increases with each cooperative interaction and moves according to a motion equation, converting the standard prisoners’ dilemma into one with a dynamic payoff matrix. We show that cooperation equilibria are possible for a wide range of parameter values within our guilt-based dynamic model, even if we do not exogenously assume that players necessarily cooperate in the first period of the game. We examine the likelihood of cooperation and find that higher guilt retention or discount factors, a longer time horizon, and greater SPG-responsiveness to cooperation in each period all increase the likelihood of equilibrium cooperation.