Finite-Order Beliefs and Welfare-Enhancing Instruments in the Centipede Game

Anke Gerber and Philipp Wichardt

No 322, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: This paper investigates the effectiveness of two instruments designed to defer termination in the centipede game: an insurance against termination by the opponent, and an option to offer the opponent a bonus for not terminating the game. The rational prediction in both cases is passing until close to the end. Empirically, however, only the bonus option is used by the subjects. The results indicate that subjects readily understand the strategic effect of the bonus, which, once offered, renders passing until close to the end the strictly dominant strategy for both players. Yet, they fail to realise the slightly more involved strategic signal entailed in the insurance, namely that passing until close to the end is a strictly dominant strategy for an insured player. In order to further investigate this effect, we propose a simple behavioural model based on level-k thinking and show that it is largely consistent with the data.

Keywords: Centipede Game; Cooperation; Level-k Thinking (search for similar items in EconPapers)
JEL-codes: C91 D61 (search for similar items in EconPapers)
Date: 2007-12
New Economics Papers: this item is included in nep-gth
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Persistent link: https://EconPapers.repec.org/RePEc:zur:iewwpx:322

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