Payment schemes in infinite - horizon experimental games ∗

We consider payment schemes in experiments that model infinite-horizon games by using random termination. We compare paying subjects cumulatively for all periods of the game; with paying subjects for the last period only; with paying for one of the periods, chosen randomly. Theoretically, assuming expected utility maximization and risk neutrality, both the Cumulative and the Last period payment schemes induce preferences that are equivalent to maximizing the discounted sum of utilities. The Lastperiod payment is also robust under different attitudes towards risk. In comparison, paying subjects for one of the periods chosen randomly creates a present period bias. We further provide experimental evidence from infinitely repeated Prisoners’ Dilemma games that supports the above theoretical predictions.