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Payment Schemes in Infinite-Horizon Experimental Games

Author

Listed:
  • Katerina Sherstyuk

    (Department of Economics, University of Hawaii at Manoa)

  • Nori Tarui

    (Department of Economics, University of Hawaii at Manoa)

  • Tatsuyoshi Saijo

    (Department of Economics, Osaka University)

Abstract

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. We further provide experimental evidence from in nitely repeated Prisoners' Dilemma games that supports the above theoretical predictions.

Suggested Citation

  • Katerina Sherstyuk & Nori Tarui & Tatsuyoshi Saijo, 2011. "Payment Schemes in Infinite-Horizon Experimental Games," Working Papers 201118, University of Hawaii at Manoa, Department of Economics.
    • Handle: RePEc:hai:wpaper:201118
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    File URL: http://www.economics.hawaii.edu/research/workingpapers/WP_11-18.pdf
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    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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