CARF-F-414|Asset Price Bubbles and the Financial System
Accuracy and Retaliation in Repeated Games with Imperfect Private Monitoring: Experiments and Theory (Revised version of F-381)
We experimentally examine repeated prisoner’s dilemma with random termination, in which monitoring is imperfect and private. Our estimation indicates that a significant proportion of subjects follow generous tit-for-tat strategies, straightforward extensions of tit-for-tat. However, the observed retaliating policies are inconsistent with the generous tit-for-tat equilibria. Contrary to the theory, subjects tend to retaliate more with high accuracy than with low accuracy. Specifically, they tend to retaliate more than the theory predicts with high accuracy, while they tend to retaliate lesser with low accuracy. In order to describe these results as unique equilibrium, we demonstrate an alternative theory that incorporates naïveté and reciprocity.