Journal of Economic Behavior & Organization 106 (2014) 352–366 Cont ent s list s ava ilable at ScienceDirect JournalofEconomicBehavior &Organization j ournal hom epage: www.elsevier.com/locate/jebo Strategiccomplexityandcooperation: Anexperimental study MatthewT.Jones ∗ Federa l Trade Commi ssion articleinfo Article history: Rec eived 5 November 2013 Received in revi sed form 8 July 2014 Acce pted 14 Jul y 201 4 Ava ilable onl ine 22 Jul y 201 4 JEL classification: C93 C73 D03 Keywords: Complexity Pris oner’s dilemma Repea ted game Bounde d rati onali ty Finit e automata abstract Thisstudyinvestigateswhethercooperationinanindefinitelyrepeatedprisoner’sdilemma is sen sit ivetothecomplexityofcooperativestrategies. An exp eri men tal designwhich allowsmanipulationsofthecomplexityofthesestrategiesby mak ing eitherthecooperate actionorthedefectactionstate-dependent is use d. Subjectsarefoundtobelesslikelytouse acooperativestrategyandmorelikelytousea simple rselfishstrategywhenthecomplex- it y of cooperativestrategiesisincreased. Therobustnessofthiseffectissupportedby t he findingthatcooperationfallsevenwhenthedefectactionis mad estate-dependent, which increases thecomplexityofpunishment-enforced cooperativestrategies. A l in kbetween subjects’standardizedtestscoresandthelikelihoodofcooperatingisfound,indicatingthat greater cogni tiveabilitymakessubjectsmorelikelytousecomplexstrategies. Publishedby Else vier B.V. 1. Intro duction To impl ement a strate gy in a re pe at ed ga me, a pl ay er must pr ocess an d resp ond to in format io n sh e rece iv es fr om he r en vi ronment such as the beha vi or of op po nents, th e st at e of nature, et c. In tu itively, one can say that the complexi ty of a re pe at ed ga me strate gy de pe nds on th e amou nt of info rmat ion th at mu st be pr oc es se d to impl emen t it . Fo r exampl e, con sid er a repeated oli gop oly pri cing game in which firms seta price in eac h stage aft er rec eiv ing inf ormation abo ut demand conditions and the pr ices set by ri vals . To us e a comp etitive pricing strate gy, a firm se ts its pr ice equal to a constant marginal co st in eac h st ag e. To use a co ll us iv e pri ci ng str ate gy, a fi r m sets its pri ce co nd iti on al on th e de ma nd s ta te a s well asthe pri ces set by rival firms. Hence, the col lus ive pricing strate gy can be called more complex bec ause implement ing it involves pr oc essi ng more information. If ther e ar e costs associated wi th th is information pr oces si ng in the form of manage me nt compen sat ion , ope rat ing costs, et c., the y can aff ect the firm’s pri cin g strate gy choiceand mak ea rel ati vely comple x col lusiv e strat egy less like ly to be used. Simi larly , cogni tivecosts assoc iated withinformation proce ssingmayinflu ence repe ated game str ate gy cho ice on the ind ivi dua l lev el, yie ldi ng imp ort ant conseq uences for coo per ati on and effi cie ncy . Thi s wor k is suppor ted by the NSF under Gra nt No. SES-1121085. Any opi nions, findings and conc lus ions or recommendati ons exp res sed are tho se oftheauthor and do not necessari ly reflect the vi ews of the Federal Tr ade Commissi on or the NSF. ∗ Cor res pond ence to: 600 Pennsylva nia Avenue, NW,Mai l Dro p HQ- 238 , Was hington, DC, Uni ted Sta tes . Tel .: +1 202 326 353 9. E-mailaddress: [email protected]http://dx.doi.org/10.1016/j.jebo.2014.07.005 0167- 2681/P ublis hed by Else vier B.V.
