An Experimental Study of Imperfect Public Monitoring : Efficiency Versus Renegotiation-Proofness

We study experimentally behavior in a repeated partnership game with public imperfect monitoring, and focus on whether subjects are affected by renegotiation concerns. The signal in our design is rather simple: it indicates only a success or a failure in each period. In some treatments, the equilibrium with the highest payoffs is renegotiation-proof, while in others it is not. Results indicate subjects' play is affected by the inclusion of a choice that permits some cooperation with more forgiving punishments, but that they do not play the renegotiation-proof equilibrium. However, when the renegotiation hypothesis predicts forgiving (short) punishments, subjects using cooperative strategies are indeed more likely to be forgiving. The experiment also reveals the use of strategies that have not been documented before, highlighting the importance of exploring different monitoring structures. Finally, our design includes communication, which we observe to be used to reduce strategic uncertainty