Cooperation in an Overlapping Generations Experiment

Recent theoretical work shows that folk theorems can be developed for infinite overlapping generations games. Cooperation in such games can be sustained as a Nash equilibrium. Besides the efficient cooperative equilibrium there is also the inefficient non-cooperative equilibrium. This paper investigates experimentally whether cooperation actually occurs in a simple overlapping generations game. Subjects both play the game and formulate full strategies. In our base-line treatment subjects fail to exploit the intertemporal structure of the game. When we provide subjects with a recommendation to play a (subgame perfect) grim trigger strategy, a substantial part of the population develops trigger-like strategies. However, a remaining group of unconditional defectors prevents the cooperative outcome to evolve. JEL codes: C72, C92, D90. Key-words: overlapping generations, cooperation, trigger strategies, experiments Theo Offerman Jan Potters and Harrie A.A.Verbon University of Amsterdam Tilburg University Department of Economics /CREED CentER/Department of Economics Roetersstraat 11 Warandelaan 2 1018 WB Amsterdam 5000 LE Tilburg Netherlands Netherlands e-mail: [email protected] [email protected], [email protected] * We gratefully acknowledge financial support from the Netherlands Organization of Scientific Research (NWO). The research by Jan Potters is made possible by a fellowship of the Royal Netherlands Academy of Arts and Sciences. We thank Henk OpdenBrouw for programming the experiment. 1 The possibility of cooperation in overlapping generations has been studied and established more generally. Folk theorems may arise, similar to the ones for 'genuine' infinitely repeated games (Cremer, 1986, Salant, 1991, Smith, 1992).