Flexibility, Communication and Cooperation with Imperfect Monitoring

Flexibility – the possibility to react swiftly to others’ choices – facilitates cooperation by reducing the gains from defection. With imperfect monitoring, however, flexibility may also hinder cooperation by inducing punishment after too few noisy signals. In theory, the interplay of these forces should generate an inverse U-shaped effect of flexibility on cooperation. To test this subtle prediction, we implement a repeated Cournot game under imperfect monitoring in the lab and change the delay with which subjects can react to noisy signals. Results are as subtle as the theoretical prediction, and depend crucially on subjects’ ability to communicate. A content analysis of the communication confirms the behavioral relevance of the main strategic forces highlighted by the theory. JEL: C73, C92, D43, L13, L14.