Significance
Like the Prisoner's Dilemma, this game presents a conflict between self-interest and mutual benefit. If it could be enforced, both players would prefer that they both cooperate throughout the entire game. However, a player's self-interest or players' distrust can interfere and create a situation where both do worse than if they had blindly cooperated. Although the Prisoner's Dilemma has received substantial attention for this fact, the Centipede Game has received relatively less.
Additionally, Binmore (2005) has argued that some real-world situations can be described by the Centipede game. One example he presents is the exchange of goods between parties that distrust each other. Another example Binmore likens to the Centipede game is the mating behavior of an hermaphroditic sea bass which take turns exchanging eggs to fertilize. In these cases, we find cooperation to be abundant.
Since the payoffs for some amount of cooperation in the Centipede game are so much larger than immediate defection, the "rational" solutions given by backward induction can seem paradoxical. This, coupled with the fact that experimental subjects regularly cooperate in the Centipede game has prompted debate over the usefulness of the idealizations involved in the backward induction solutions, see Aumann (1995, 1996) and Binmore (1996).
Read more about this topic: Centipede Game (game Theory)
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