Endogenous Transfers in the Prisonerâ€™s Dilemma Game: An Experimental Test Of Cooperation And Coordination
We study experimentally a two-stage compensation mechanism for promoting cooperation in prisonerâ€™s dilemma games. In stage 1, players simultaneously choose binding non-negative amounts to pay their counterparts for cooperating in a given prisonerâ€™s dilemma game, and then play the prisonerâ€™s dilemma game in stage 2 with knowledge of these amounts. For the asymmetric prisonerâ€™s dilemma games we consider, all payment pairs consistent with mutual cooperation in subgame-perfect equilibrium transform these prisonerâ€™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. There is substantial scope for this compensation mechanism to achieve beneficial social outcomes in commerce and in international affairs, and reason to be concerned about the ability of firms to design collusive agreements.
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