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Payment schemes in random-termination experimental games

  • Katerina Sherstyuk


    (Department of Economics, University of Hawaii at Manoa)

  • Nori Tarui


    (Department of Economics, University of Hawaii at Manoa)

  • Majah-Leah Ravago


    (Department of Economics, University of Hawaii at Manoa)

  • Tatsuyoshi Saijo


    (Department of Economics, Osaka University)

We consider payment schemes in experiments that model infinite-horizon games by using random termination. We compare paying subjects cumulatively for all periods of the game; with paying subjects for the last period only; with paying for one of the periods, chosen randomly. Theoretically, assuming expected utility maximization and risk neutrality, both the cumulative and the last-period payment schemes induce preferences that are equivalent to maximizing the discounted sum of utilities. The last-period payment is also robust under different attitudes towards risk. In comparison, paying subjects for one of the periods chosen randomly creates a present-period bias. Experimentally, we find that the cumulative payment appears the best in inducing long-sighted behavior.

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Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 201102.

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Length: 33 pages
Date of creation: 01 Mar 2011
Date of revision:
Handle: RePEc:hai:wpaper:201102
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