Inducing Cooperation by Self-Stipulated Penalties

Cheng-Zhong Qin

This paper considers an approach for inducing cooperation in prisoner’s dilemma. The approach is based on players individually committing to pay self-stipulated penalties for defection. We provide a complete characterization of self-stipulated penalties that are necessary and sufficient to induce the players to cooperate in subgame-perfect equilibrium. An alternative interpretation of the conditions using contract remedies is provided.