Ernst Fehr – Experimental & Behavioral Economics 1Cooperation and Public Goods Provision• A basic design• Determinants of voluntary cooperation¾ Marginal private benefits¾ Group size¾ Communication• Why do people cooperate?¾ Strategic cooperation¾ Cooperation as a mistake¾ Conditional Cooperation• Testing an incentive compatible mechanism for the private provision of public goods• Cooperation and private punishmentErnst Fehr – Experimental & Behavioral Economics 2Cooperation problems• Cooperative hunting and warfare (important during human evolution)• Exploitation of common pool resources• Clean environment• Teamwork in organizations• Collective action (demonstrations, fighting a dictatorship)• VotingBasic economic problem• Cooperative behavior has a positive externality.• Hence, private marginal benefit is smaller than social marginal benefit → underprovision relative to the efficient level.Ernst Fehr – Experimental & Behavioral Economics 3A Basic Design• Group with n subjects.• yiis endowment of player i.• 2 investment possibilities Private account Public good (called “project”, “alternative B”)• ci= contribution to the public good.• Simultaneous contribution decision.• One-shot game or finitely repeated game.• Average contribution in the group or contribution vector as feedback.• Income per period:∑=+−=njjiiiccy1)(απErnst Fehr – Experimental & Behavioral Economics 4Prediction• If α< 1: ci= 0 is a dominant strategy• If nα> 1 surplus maximization requires ci= yi• Typical example n = 4 yi = 20α = 0.4 Groups randomly rematched for 10 periods (stranger design)  or stable group composition for 10 periods (partner design)Ernst Fehr – Experimental & Behavioral Economics 5Determinants of Voluntary CooperationIsaac, Walker, Thomas (1984)• Aim: Isolate effects of group size and the MPCR α.• πi=y-ci+αΣci• α measures the private marginal benefit, nα the social marginal benefit. • Income from private account y-ciwas private information; income from group account (αΣci) was public information. • 10 periods, public information• Information feedback at the end of each period: sum of contributions and private income. D: n=10, MPCR=.75, nα =7.5B: n=10, MPCR=.3, nα =3C: n=4, MPCR=.75, nα =3A: n=4, MPCR=.3, nα=1.2•A-C, B-D: MPCR-effect•A-B, C-D: Group size effect with constant MPCR•B-C: Group size effect with constant group benefit nαErnst Fehr – Experimental & Behavioral Economics 6Ernst Fehr – Experimental & Behavioral Economics 7Results• Table shows average contributions in percent• Cooperation increases with MPCR for both n.• Cooperation increases with n if MPCR is low (not when it is high). • Cooperation decreases with n if group benefit nα constant. • Cooperation decreases over time, in particular in treatments with low MPCR.• MPCR-effect is present in all periods.• Group size effect at low MPCR vanishes over time.n=10n=4MPCR=.75MPCR=.3D: 59B: 33C: 57A: 19Ernst Fehr – Experimental & Behavioral Economics 8Further Results• Experienced subjects cooperate significantly less. • Experiments with larger groups (40 and 100) Cooperation does not decline over time if MPCR = .3 and n = 40.  If MPCR = .03 and n = 40 cooperation rapidly declines.  Conjecture: If n increases at a constant MPCR the probability of “beneficial” coalitions rises. Assumes that subjects’ earnings at zero cooperation are a reference point. If sufficiently many cooperate they earn more although they also cooperate.Ernst Fehr – Experimental & Behavioral Economics 9From Davis & Holt 1993Ernst Fehr – Experimental & Behavioral Economics 10Communication & Voluntary Cooperation(Isaac & Walker 1988)• n = 4, α = .3, two sequences with 10 periods each, partner design.• Communication opportunities (C): Players can discuss what they want to do in the experiment. Yet, no revelation of endowments, no threat and no side payments allowed. • Treatments1.C – NC, players have the same endowment. 2.NC – C, players have the same endowment3.C – NC, asymmetric endowments.Ernst Fehr – Experimental & Behavioral Economics 11Ernst Fehr – Experimental & Behavioral Economics 12Results• Start with C: High cooperation rates; also in the second NC-phase.• Start with NC: Unraveling of cooperation in NC but after C rapidincrease in cooperation.• Asymmetric endowments partly undermine positive communication effects.• Interpretation• If selfishness and rationality is common knowledge communication should play no role.• Suggests that subjects have motives beyond self-interest• Keeping promises, sympathy, social approval• Conditional cooperationErnst Fehr – Experimental & Behavioral Economics 13Why do people cooperate?• Mistakes, initially they don’t understand that zero cooperation is a dominant strategy. • Strategic cooperation (Kreps et al., JET 1982) There are strategic (rational) and tit-for-tat players. Strategic players cooperate (except in the final period) if theybelieve they are matched with tit-for-tat players.  Strategic players mimic tit-for-tat players (i.e. they cooperate) to induce other strategic players to cooperate.  Holds for certain parameter values• Social preferences Altruism, “warm glow”, “efficieny”-seeking motives Conditional cooperation, ReciprocityErnst Fehr – Experimental & Behavioral Economics 14Why does cooperation decline over time?• Mistakes It takes time to learn to play the dominant strategy.• Strategic cooperation if group composition is constant.• Social preferences Subjects are conditionally cooperative and learn that there are free-riders in the group. As a response they punish other group members by choosing lower cooperation levels.Ernst Fehr – Experimental & Behavioral Economics 15Discriminating between competing explanations• One-shot-game rules out strategic cooperation but it also rules out learning to play the dominant strategy. • Partner-Stranger-Comparison (Andreoni 1988)¾ Partner: same group composition in all periods.¾ Stranger: random recomposition of groups in every period.  If partners cooperate more: support for strategic cooperation hypothesis However: It is also consistent with a miscoordinationhypothesis. Conditional cooperators can better avoid miscoordination in a partner design. • Surprise restart: if subjects cooperate