Approval Mechanism to Solve Prisoner’s Dilemma: Comparison with Varian’s Compensation Mechanism

After having played a prisoner’s dilemma, players can approve or reject the other’s choice of cooperation or defection. If both players approve the other’s choice, the outcome is just the result of the chosen strategies in the prisoner’s dilemma; however, if either rejects the other’s choice, the outcome is the result of mutual defection in the prisoner’s dilemma. In theory, such an approval mechanism implements cooperation in backward elimination of weakly dominated strategies, although this is not the case in subgame perfect Nash equilibrium. By contrast, Varian’s (1994; A solution to the problem of externalities when agents are well-informed. Am Econ Rev 84(5): 1278-1293) compensation mechanism implements cooperation in the latter but not in the former, which motivates the present study. The approval mechanism sessions yield a cooperation rate of 90% in the first period and 93.2% across periods, while the compensation mechanism sessions yield a rate of 63.3% in the first period and 75.2% across periods, indicating a significant difference. In addition, the backward elimination of weakly dominated strategies better predicts subjects’ behavior than subgame perfect Nash equilibrium in both mechanism sessions. JEL codes: C72, C73, C92, D74, P43