Payoffs, Beliefs, and Cooperation in Infinitely Repeated Games

Disentangling the determinants of cooperation in social dilemmas remains paramount in economics. This paper shows theoretically that a player's belief about their opponent’s probability of cooperation determines the effect of payoff changes on cooperation in the infinitely repeated prisoner's dilemma: While increasing the gain from unilateral defection strongly decreases cooperation iff beliefs are high, increasing the loss from unilateral cooperation strongly decreases cooperation iff beliefs are low. Otherwise, the effects of payoff changes are negligible. Two empirical tests support the theory: A meta study based on existing experimental data and a new laboratory experiment, where we vary beliefs exogenously.