The Perverse Costly Signaling Effect on Cooperation under the Shadow of the Future

A literature in the social sciences proposes that humans can promote cooperation with strangers by signaling their generosity through investment in unrelated pro-social activities. This paper studied this hypothesis by conducting a laboratory experiment with an infinitely repeated prisoner’s dilemma game under random matching. A novel feature of the experiment is that each player first decided how much to donate to a charitable organization, the British Red Cross, and then this donation information was conveyed to the player’s matched partner. Surprisingly, the donation activities significantly undermined cooperation. This negative effect of charitable-giving was consistently observed regardless of whether players had a post-interaction opportunity to punish the partners. A detailed analysis suggests that the negative effect (a) resulted from the transmission of the charitable-giving information, not from the fact that subjects engaged in the charitable-giving, and (b) was caused by mis-coordination between the two parties who can both costly signal their generosity. This suggests that letting players have an implicit costly signaling opportunity has damaging unintended consequences for their interactions among strangers. Possible ways to encourage players to use costly signaling for mutual cooperation, such as partner choice, are also discussed in the paper.