The efficient interaction of costly punishment and commitment.

To ensure cooperation in the Prisoner's Dilemma, agents may require prior commitments from others, subject to compensations when defecting after agreeing to commit. Alternatively, agents may prefer to behave reactively, without arranging prior commitments, by simply punishing those who misbehave. These two mechanisms have been shown to promote the emergence of cooperation, yet are complementary in the way they aim to instigate cooperation. In this work, using Evolutionary Game Theory, we describe a computational model showing that there is a wide range of parameters where the combined strategy is better than either strategy by itself, leading to a significantly higher level of cooperation. Interestingly, the improvement is most significant when the cost of arranging commitments is sufficiently high and the penalty reaches a certain threshold, thereby overcoming the weaknesses of both strategies.SCOPUS: cp.pinfo:eu-repo/semantics/publishe

The Evolution of Social Contracts

Influential thinkers such as Young, Sugden, Binmore, and Skyrms have developed game-theoretic accounts of the emergence, persistence and evolution of social contracts. Social contracts are sets of commonly understood rules that govern cooperative social interaction within societies. These naturalistic accounts provide us with valuable and important insights into the foundations of human societies. However, current naturalistic theories focus mainly on how social contracts solve coordination problems in which the interests of the individual participants are aligned, not competition problems in which individual interests compete with group interests. In response, I set out to build on those theories and provide a comprehensive naturalistic account of the emergence, persistence and evolution of social contracts. My central claim is that social contracts have culturally evolved to solve cooperation problems, which include both coordination and competition problems. I argue that solutions to coordination problems emerge from “within-group” dynamics, while solutions to competition problems result largely from “between-group” dynamics

Money and Credit With Limited Commitment and Theft

We study the interplay among imperfect memory, limited commitment, and theft, in an environment that can support monetary exchange and credit. Imperfect memory makes money useful, but it also permits theft to go undetected, and therefore provides lucrative opportunities for thieves. Limited commitment constrains credit arrangements, and the constraints tend to tighten with imperfect memory, as this mitigates punishment for bad behavior in the credit market. Theft matters for optimal monetary policy, but at the optimum theft will not be observed in the model. The Friedman rule is in general not optimal with theft, and the optimal money growth rate tends to rise as the cost of theft falls.

Threats and Promises

Global environmental concerns have increased the sensitivity of governments and other parties to the actions of those outside their national jurisdiction. Parties have tried to extend influence extraterritorially both by promising to reward desired behavior and by threatening to punish undesired behavior. If information were perfect, the Coase theorem would suggest that either method of seeking influence could provide an efficient outcome. If the parties in question have incomplete information about each other's costs and benefits from different actions, however, either method can be costly, both to those seeking influence and in terms of overall efficiency. We compare various methods of seeking influence. A particular issue is dissembling: taking an action to mislead the other party about the cost or benefit of that action. By creating an incentive to dissemble, attempts to influence another's behavior can have the perverse effect of actually encouraging the action that one is trying to discourage.

Carrot or Stick? Group Selection and the Evolution of Reciprocal Preferences

This paper studies the evolution of both characteristics of reciprocity - the willingness to reward friendly behavior and the willingness to punish hostile behavior. Firstly, preferences for rewarding as well as preferences for punishing can survive evolution provided individuals interact within separated groups. This holds even with randomly formed groups and even when individual preferences are unobservable. Secondly, preferences for rewarding survive only in coexistence with self-interested preferences. But preferences for punishing tend either to vanish or to dominate the population entirely. Finally, the evolution of preferences for rewarding and the evolution of preferences for punishing influence each other decisively. The existence of rewarders enhances the evolutionary success of punishers, but punishers crowd out rewarders

Trust, Communication and Contracts: An Experiment

In the one-shot trust or investment game without opportunities for reputation formation or contracting, economic theory predicts no trusting because there is no incentive for trustworthiness. Under these conditions, theory predicts (a) no effect of pre-play communication, and (b) universal preference for moderate cost binding contracts over interacting without contracts. We introduce the opportunities to engage in pre-play communication and to enter binding or non-binding contracts, and find (a) communication increases trusting and trustworthiness, (b) contracts are largely unnecessary for trusting and trustworthy behaviors and are eschewed by many players, and (c) more trusting leads to higher earnings, and (d) both trustors and trustees favor “fair and efficient” proposals over the more unequal proposals predicted by theory.trust game, trust, trustworthiness, reciprocity, commitment, communication. Comparative analysis of agency problems, Production of public goods

The Social Cost of Blackmail

Despite the fact that blackmail constitutes a voluntary transaction between two parties, it is deemed to be a criminal offence in most legal systems. Traditional economic approach to this so-called ‘paradox of blackmail’ emphasizes welfare loss generated by the costly rentseeking activities of potential blackmailers as the primary justification for its criminalization. This argument however does not extend to cases in which potentially damaging information about the victim was acquired by the blackmailer at no cost. It also does not seem to shed light on a related puzzle: why is it legal for a potential victim to bribe the other party with the purpose of achieving the same final outcome (suppression of information) as in the case of blackmail? This paper addresses these questions in a simple model of bargaining under asymmetric information which is used as a unified framework for studying both blackmail and bribery. Under asymmetric information the bargaining outcome is not efficient regardless of the distribution of the bargaining power. However, when the blackmailer is the monopolist seller of the information inefficiency results from his demands being too high relative to the social optimum, providing justification for the practice of penalizing blackmail. On the other hand, when a victim is the monopolist buyer of the information the equilibrium offer is inefficiently low implying that its punishment would be counterproductive. These arguments provide further support for the claim that under reasonable assumptions criminalization of blackmail can be justified on efficiency grounds.blackmail, bribery, bargaining

Foreign aid and rent-seeking

To address the relationship between concessional assistance, corruption, and other types of rent-seeking activities, the author provides a simple game-theoretic rent-seeking model. Insights with interesting implications emerge from the analysis: 1) An increase in government revenue (from windfalls, for example, or from increased foreign aid) does not necessarily lead to the provision of more public goods and in certain circumstances may reduce it. 2) The mere expectation of aid may suffice to increase rent-dissipation and reduce productive public spending. But if the donor community can enter into a binding policy commitment, this result may be reversed. The author provides some preliminary empirical evidence in support of the hypothesis that windfalls and foreign aid, in countries suffering from a divided policy process, are on average associated with more extensive corruption. He finds no evidence that donors systematically allocate aid to countries with less corruption. The results accords with recent empirical findings that aid is more effective, the greater the effort to direct it to good performers. But such a regime shift may involve an aid policy that in the short run provides more assistance to countries in less need and less aid to those in most need. Enforcing such a regime shift might be difficult.Environmental Economics&Policies,Development Economics&Aid Effectiveness,Decentralization,Gender and Development,Economic Theory&Research,Economic Theory&Research,Environmental Economics&Policies,Governance Indicators,Inequality,Development Economics&Aid Effectiveness

Human nature and institutional analysis

This essay reviews some findings in cognition sciences and examines their consequences for the analysis of institutions. It starts by exploring how humans’ specialization in producing knowledge ensures our success in dominating the environment but also changes fast our environment. So fast that it did not give time to natural selection to adapt our biology, causing it to be potentially maladapted in important dimensions. A main function of institutions is therefore to fill the gap between the demands of our relatively new environment and our biology, still adapted to our ancestral environment as hunter-gatherers. Moreover, institutions are built with the available elements, which include our instincts. A deeper understanding of both aspects, their adaptive function and this recruitment of ancestral instincts, will add greatly to our ability to manage institutions.Evolution, biology, behavior, institutions

Providing Public Goods Without Strong Sanctioning Institutions

This paper proposes a simple mechanism aimed to establish positive contributions to public goods in the absence of powerful institutions to sanction free-riders. The idea of the mechanism is to require players to commit to the public good by paying a deposit prior to the contribution stage. If all players commit in this way, those players who do not contribute their share to the public good forfeit their deposit. If there is no universal commitment, all deposits are refunded and the standard game is played. Given deposits are sufficiently high, prior commitment and full ex post contributions are part of a strict subgame perfect Nash equilibrium for the resulting game. As the mechanism obviates the need for any ex post prosecution of free-riders, it is particularly suited for situations where players do not submit to a common authority as in the case of international agreements