Equilibrium cooperation in two-stage games: Experimental evidence

This paper reports results of an experiment designed to investigate the nat ure of cooperation and punishment. Subjects are matched in a series of two- person, two-stage games with a sequential equilibrium that supports first-s tage cooperation with a credible threat of subsequent punishment. Participa nts sometimes used a consistent punish/reward strategy, and when they did, cooperation rates increased dramatically. The results thus contradict "payo ff relevance": second-stage behavior can be influenced by first-stage outco mes that have no effect on the payoff structure. Nevertheless, high coopera tion rates were often not observed, even with a Pareto undominated "punishm ent" equilibrium in the second stage.