Collusion as public monitoring becomes noisy: Experimental evidence

This paper uses laboratory experiments to test the implications of the theory of repeated games on equilibrium payoffs and estimate strategies in an infinitely repeated prisoners’ dilemma game with imperfect public monitoring. We find that subjects’ payoffs (i) decrease as noise increases, and (ii) are lower than the theoretical maximum for low noise, but exceed it for high noise. Under the assumption that the subjects’ strategy uses thresholds on the public signal for transition between cooperation and punishment states, we find that the best fitting strategy simply compares the most recent public signal against a single threshold. © 2008 Elsevier Inc. All rights reserved. JEL classification: C72; C73; C92