Building rational cooperation

Experiments have shown that people have a natural taste for cooperation. This paper takes a first step in understanding how formal and informal institutions might be designed to utilize these private tastes to facilitate more efficient economic interactions. We examine a twice-played prisoner’ dilemma in which the total of the stakes in the two periods is fixed, but the distribution of these stakes can be varied across periods. We verify experimentally that it is best to “start small,” reserving most of the stakes for the second period. JEL numbers C70, C90, D64, Z13.