Preplay contracting in the Prisoners’ Dilemma

We consider a modified Prisoners’ Dilemma game in which each agent can offer to pay the other agent to cooperate. The subgame perfect equilibrium of this two-stage game is Pareto efficient. We examine experimentally whether subjects actually manage to achieve this efficient outcome. We find an encouraging level of support for the mechanism, but also find some evidence that subjects’ tastes for cooperation and equity may have significant interactions with the incentives provided by the mechanism.