Cooperation under the Shadow of the Future: Experimental Evidence from Infinitely Repeated Games
Pedro Dal Bó
(Brown University)
October 12th
Lubrano Conference Room

Abstract

The tension between private incentives that encourage opportunistic behavior and the common good that comes from cooperation is a central feature of human interaction. The main contribution of Game Theory to the study of this tension and its remedies is to recognize that repeated interaction may enable punishment and reward schemes that prevent or limit opportunistic behavior and support cooperation. When there is always a future, as in infinitely repeated games, the credible threat of future retaliation casts "the shadow of the future" in every decision and can overcome opportunistic behavior and support cooperation, thereby solving the tension between private incentives and the common good.

However, the experimental evidence on infinitely repeated games is scarce and in most cases inconclusive or presents methodological problems. In this paper I report a series of experiments that overcome the shortcomings of previous experiments on infinitely repeated games. I find that the possibility of future interaction modifies players' behavior resulting in fewer opportunistic actions and supporting cooperation, closely following theoretical predictions.