Overview
- Discusses why cooperation arises despite dominant strategies favoring defection in one-shot games.
- Explains how repeated interaction, trust, communication, social distance, social norms, and fairness encourage cooperative behavior.
- Uses examples: prisoner's dilemma, study partners, restaurants, public goods game, and the ultimatum game.
Repeated Games
- Repeated interactions change incentives versus a single-play game.
- Future consequences (loss of partners or reputation) encourage cooperation.
- Example: study partners maintain cooperation to avoid losing beneficial collaboration.
Trust And Reputation
- Trust reduces transaction costs and enables gains from trade.
- Reputation mechanisms (reviews, repeat business) discourage cheating.
- Internet reviews (e.g., Yelp, TripAdvisor) help enforce good behavior by spreading information.
- Economies with low trust face higher costs protecting against scams, reducing trade.
Communication
- Being able to communicate clarifies motives and reduces misunderstandings.
- Lack of face-to-face contact (e.g., online interactions) increases conflict and negative assumptions.
- Communication often facilitates cooperation where simultaneous, non-communicative moves would not.
Social Distance And Group Identity
- Social distance = perceived closeness to others, not physical distancing.
- Shared identity increases cooperation even among strangers.
- Example research: showing participants' photos in a public goods game increased contributions by about one third.
Social Norms
- Norms define acceptable behavior and vary across societies.
- Norms influence market functioning and individual decisions.
- People follow norms to protect reputation and because norms contribute to perceived utility.
Fairness And The Ultimatum Game
- Setup: Player A (proposer) offers a split of a sum; Player B (responder) accepts or rejects.
- If responder accepts, split occurs; if rejects, both get zero.
- Traditional prediction: proposer offers minimal amount; responder accepts any positive amount.
- Empirical result: offers below ~25% often rejected; 50/50 splits common.
- People reject low offers due to fairness concerns and to uphold norms; this behavior is rational if utility includes fairness and reputation.
Key Terms And Definitions
- Repeated Game: A game played multiple times where past play can affect future incentives.
- Reputation: Information about past behavior that influences others' willingness to transact.
- Social Distance: Degree of perceived closeness or shared identity between people.
- Social Norms: Accepted rules of behavior within a society or group.
- Ultimatum Game: A two-player game testing fairness preferences in splitting a sum.
| Concept | Effect On Behavior | Example/Note |
| Repeated Games | Encourage cooperation via future repercussions | Study partners remain cooperative to keep partnership |
| Trust/Reputation | Lowers need for protective measures; sustains trade | Online reviews help maintain restaurant quality |
| Communication | Reduces misperception; enables coordination | Face-to-face contact prevents escalation seen online |
| Social Distance | Shared identity increases cooperation | Photos in public goods game raise contributions ~33% |
| Social Norms | Shape acceptable behavior; affect markets | Fairness norms influence transaction outcomes |
| Ultimatum Game | Reveals fairness preferences overriding pure monetary gains | Offers <25% commonly rejected; 50/50 frequent |
Practical Applications / Action Items
- When transacting, consider others’ incentives and information they possess.
- Ask whether the interaction is repeated; if so, prioritize reputation maintenance.
- Use communication to clarify intentions and reduce conflicts.
- Be mindful of social norms and perceived fairness when proposing deals.
- Apply empathy: put yourself in the other person’s shoes to predict their best response.
Summary Takeaway
- Cooperative outcomes often arise from repeated interactions, trust, communication, shared identity, and fairness preferences.
- Economic rationality includes non-monetary utilities like reputation and fairness, explaining real-world cooperative behavior.