Indirect Higher Order Beliefs and Cooperation

Abstract

This paper experimentally examines why communication may matter for inducing cooperation in strategic interactions involving intermediaries. We consider a three-player centipede game in which the first and the third players do not interact sequentially, but only through the second player. We posit that the third player's decision to cooperate depends on his indirect higher order belief, that is, his belief about what the first player believes the second player would choose. The evidence demonstrates that communication between the first and the third player can effectively induce cooperation from the third player through shaping his indirect higher order belief.