Covenants before the swords: The limits to efficient cooperation in heterogeneous groups

Christian Koch, Nikos Nikiforakis and Charles N. Noussair

No 2020-09, Experimental Economics Center Working Paper Series from Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University

Abstract: When agents derive heterogeneous benefits from cooperation, a tension often arises between efficiency and equality that can impede their ability to cooperate efficiently. We design a lab experiment, in which we investigate the efficacy of communication and punishment, separately and jointly, to promote cooperation in such an environment. Our results reveal that communication allows most groups to establish covenants, i.e., agreements about the profile of individual contributions, while the threat of punishment (the 'sword') discourages deviations from the covenants. Most covenants, however, reflect a concern for equality. As a result, cooperation levels and earnings fall substantially below the maximum possible. The timing of communication is also critical: covenants reduce the use of sanctions dramatically when communication precedes punishment opportunities but when punishment precedes communication opportunities, a history of sanctioning emerges which reduces the probability that groups establish covenants subsequently. Our findings illustrate not only the benefits of early communication, but also some limits to self-governance in heterogeneous groups.

Keywords: communication; punishment; cooperation; normative conflict; heterogeneity (search for similar items in EconPapers)
JEL-codes: C92 D74 H41 (search for similar items in EconPapers)
Pages: 112
Date: 2020-05
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Persistent link: https://EconPapers.repec.org/RePEc:exc:wpaper:2020-09

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