Experiments with the Traveler's Dilemma: welfare, strategic choice and implicit collusion

This paper investigates behavior in the Traveler’s Dilemma game and isolates deviations from textbook predictions caused by differences in welfare perceptions and strategic miscalculations. It presents the results of an experimental analysis based on a 2x2 design where the own and the other subject’s bonus-penalty parameters are changed independently. We find that the change in own bonus-penalty alone entirely explains the effect on claims of a simultaneous change in one’s own and the other’s bonus-penalty. An increase in the other subject’s bonus-penalty has a significant negative effect on claims when the own bonus-penalty is low, whereas it does not have a significant effect when the own bonus-penalty is high. We also find that expected claims are inconsistent with actual claims in the asymmetric treatments. Focusing on reported strategies, we document substantial heterogeneity and show that changes in choices across treatments are to a large extent explained by risk aversion. ∗We thank participants at the ESA 2008 and IAREP 2008 annual meetings for their useful comments and suggestions, and Monica Capra for kindly providing the instructions for the Capra et al. (1999) experiment. We also thank Tommaso Reggiani for excellent research assistance. Financial support from Econometica is acknowledged. †Department of Economics, Cornell University; Ithaca, NY, 14853. ‡Department of Economics, University of Rome Tor Vergata. §Corresponding author. Department of Economics, University of Milan Bicocca. Piazza dell’Ateneo Nuovo 1, 20126 Milan, Italy. E-mail: [email protected]