Inequity Aversion and Limited Foresight in the Repeated Prisoner’s Dilemma

Reanalyzing 12 experiments on the repeated prisoner’s dilemma (PD), we identify three distinct subject types: defectors, cautious cooperators and strong cooperators. The defectors defect with a high probability in every round. Both cooperating types play semigrim behavior strategies. This simple three-type mixture fits significantly better than any model consisting of combinations of (generalized) pure strategies from the literature, which we fitted at the treatment level (considering 1051 pure-strategy mixtures), even when we use constant specifications of the three types across all experiments. The three best fitting strategies vary slightly across experiments, however. Structurally analyzing these strategies, we find that subjects have limited foresight and subjectively assign utility values to the four states (cc,cd,dc,dd) of the supergame, which relate to the original stage-game payoffs in a manner compatible with inequity aversion. This subjectively transforms the prisoners dilemma game into a coordination game and can reliably explain the strategies used across all 12 experiments and 32 treatments.