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Prisoners’ dilemma

A two-player game that illustrates the conflict between private and social incentives, and the gains that can be obtained from making binding commitments. The name originated from a situation of two prisoners who must each choose between the strategies ‘Confess’ and ‘Don’t confess’ without knowing what the other will choose. The important feature of the game is that a lighter penalty follows for a prisoner who confesses when the other does not. The game is summarized in the pay-off matrix where the negative pay-offs can be interpreted as the disutility from imprisonment.

Prisoners’ dilemma

The Nash equilibrium of the game is . The interesting feature is that this equilibrium is not Pareto efficient: the pay-off of both players would be higher if they played . However, if one player chose Don’t confess then it is individually rational for the other player to choose Confess. Without a device for making a binding commitment it is not possible for to be an equilibrium.

Reference: Oxford Press Dictonary of Economics, 5th edt.