Negotiating Cooperation under Uncertainty: Communication in Noisy, Indefinitely Repeated Interactions

Case studies of cartels and recent theory suggest that communication is a key factor for cooperation under imperfect monitoring, , where actions can only be observed with noise. We conduct a laboratory experiment to study how communication affects cooperation under different monitoring structures. Pre-play communication reduces strategic uncertainty and facilitates very high cooperation rates at the beginning of an interaction. Under perfect monitoring, , this is sufficient to reach a high and stable cooperation rate. However, , repeated communication is important to maintain a high level of cooperation under imperfect monitoring, , where players face additional uncertainty about the history of play. ( JEL C72, C73, D81, D82, D83) )