Abstract
Amid rapidly growing globalization and digitalization, trades often occur in one-time encounters, where cooperation depends on indirect reciprocity. This study investigates how people use higher-order information to aid in cooperation decisions. A random matching prisoners' dilemma experiment with optional history information up to the second order is conducted. With a novel continuous extension, we show that reputation scores standing and judging significantly affect cooperation decisions. Majority of the subjects respond to higher-order scores individually, and incorporating individual heterogeneity significantly improves the overall fit in aggregate regressions. A modified pooled mixture model classifies 31.7% of the subjects' behaviors into higher-order types. Subjects learn to use the judging score through their experiences. The reputation effect is stronger when subjects have first played the no-information baseline game, where reputation scores are more effective in a complementary way. We also find that cooperation improvement is significantly lower in the treatment with first-order information only.
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