subject. The specific choice of regressors is one among many possible ways to trace
strategies. One advantage is to detect whether subjects followed theoretically well-known
strategies such as grim trigger or tit-for-tat (Axelrod, 1984). For simplicity our strategies
embed a maximum delay of five periods. The grim trigger regressor13 has a value of 1 in
all periods following an observed defection and 0 otherwise. The five tit-for-tat
regressors have a value of 1 only in one period following an observed defection and 0
otherwise. The first takes value 1 in the period immediately following the defection. The
second takes value 1 in the second period following a defection, and so on.
If subjects switched from a cooperative to a punishment mode following an observed
defection, we expect at least one of the strategy regressors to be negative. For example, if
subjects punished for just two periods following a defection, we expect the sum of the
estimated coefficients of the grim trigger regressor and the tit-for-tat regressors to be
negative for the first and second period following a defection, and zero afterwards.
Figure 5: Strategies of the representative subject in private monitoring
13 We label a regressor “grim trigger” because it reminds us of the well-known grim trigger strategy, which
specifies a permanent shift to punishment following a defection.
23
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