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Title of Journal: Exp Econ

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Abbravation: Experimental Economics

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Springer US

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10.1007/s11517-012-0900-1

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1573-6938

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Payment schemes in infinitehorizon experimental g

Authors: Katerina Sherstyuk Nori Tarui Tatsuyoshi Saijo
Publish Date: 2012/05/19
Volume: 16, Issue: 1, Pages: 125-153
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Abstract

We consider payment schemes in experiments that model infinitehorizon 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 toward risk In comparison paying subjects for one of the periods chosen randomly creates a presentperiod bias We further provide experimental evidence from infinitely repeated prisoners’ dilemma games that supports the above theoretical predictionsThe research was supported by a research grant from the University of Hawaii College of Social Sciences and a GrantinAid for Scientific Research on Priority Areas from the Ministry of Education Science and Culture of Japan Special thank you goes to Andrew Schotter for a motivating discussion We are grateful to Jacob Goeree and two anonymous referees for many helpful suggestions to PJ Healy David Rand and seminar participants at the University of Hawaii at Manoa for their valuable comments and to Jay Viloria Joshua Jensen and Chaning Jang for research assistanceThe figure indicates that for periods t1 the random payment scheme continues to induce the presentperiod bias in behavior compared to the cumulative payment scheme as fracdeltart tsum tau =t+1infty deltart tau frac1pp However this bias decreases and fracdeltart tsum tau =t+1infty deltart tau approaches frac1pp from above as t grows This suggests that incentives to cooperate increase as the game progresses under random pay but they are never as strong as the incentives to cooperate under cumulative pay


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