This award funds research on how groups of individuals can encourage honesty and cooperation. The foundation of economic activity and growth is in the ability of individuals to trust and trade with each other over time. Throughout human history, much of economic activity occurs in realms where formal legal institutions are unwilling or unsuited to enforce cooperative behavior. In such circumstances, more informal kinds of enforcement can encourage cooperation and honest dealing. Past research suggests that the networked pattern of social relationships plays a key role in this kind of informal enforcement. Suppose someone cheats on an agreement. The cheater will be punished not just by his partners in the agreement but by others who learn about the cheating through friends, colleagues, and business partners. This specific research program uses economic theory and laboratory experiments to study how communities enforce cooperation through their social networks.
The modeling framework is a novel synthesis of repeated games and social networks: the PIs study a society of long-lived individuals whose connection in a social network embodies an ongoing productive relationship with moral hazard. The research team is developing a new modeling framerwork that permits individuals to set the stakes of their partnerships: higher stakes lead to higher cooperation payoffs but increase the temptation to shirk even more. Over time, each player observes only the behavior in her own partnerships.
The first part of this project develops a theory of network-based contagion equilibria in which deviations from a cooperative arrangement spread contagiously in a community. The researchers extend previous results on contagion to our network setting, and show that contagion equilibria generally exist, and in certain cases are efficient. They are able to use their construction of contagion equilibria to analyze how the demands of cooperation shape social architecture: which social network delivers the greatest cooperation?
The second part of this project studies an alternative form of informal enforcement in which individuals who deviate are ostracized by others, but innocent players are not punished. Towards understanding ostracism, the PIs develop a theory of community enforcement with communication. Peliminary results indicate that permanent ostracism is ineffective, as it fails to provide appropriate communication incentives, but that that temporary ostracism?in which a guilty player is readmitted to cooperative society on paying a fine?is more effective. Similarly, ostracism may be effective if players have a particular form of interdependent preferences: they feel sympathetic towards a player cheated by another, and are willing to make a transfer to the victim. Finally, the PIs will conduct laboratory decision experiments to test whether or not actual people do have this particular kind of sympathy for others.
Broader impacts: This work will help shed light on the arrangements and institutions seen in developing and transitional economies, as well as historically. By rigorously studying the limits of cooperation in a networked society, our work will illuminate the role that informational intermediaries (services like notarization, credit reporting, and auditing) play in supporting cooperation. Understanding the significance of social networks in informal governance will help social scientists and policymakers understand how communities build social capital and trust.