1 University of Auckland Winter Week Lectures Third Lecture 4 July 2007 Associate Professor Ananish Chaudhuri Department of Economics University of Auckland

What affects beliefs and cooperation? Mark Isaac and James Walker look at Group size What happens when the size of the group changes (small or large) Collective action may be more difficult with larger groups Marginal Per capita return (MPCR) What happens when the return on the investment goes up or goes down? With 4 players if each dollar contributed is DOUBLED and redistributed equally then the return per dollar is (2/4) = $0.50. If $1 is TRIPLED and divided by 4 then the return is (3/4) = $0.75

3 What affects beliefs and cooperation? Amount placed in the private account for each player is known only by that particular player Everyone knows the total contribution to the group account Play for 10 periods Players are told their total earnings at the end of each round

4 What affects beliefs and cooperation?

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6 Results Average contributions in percent

7 Results Cooperation increases with MPCR for both groups of size 4 and groups of size 10. Cooperation increases with group size if MPCR is low (not when it is high). Cooperation decreases over time

8 What happens if we use even larger groups? Isaac, Walker and Williams look at groups of 4, 10, 40 and 100 Two MPCR treatments: MPCR = 0.3 MPCR = 0.75

9 n = 4 n = 10 n = 100 n = 40 Larger groups do better Not much difference LOW RETURNS HIGH RETURNS

10 What happens if we use even larger groups? For MPCR = 0.3 larger groups are more cooperative For MPCR = 0.75 no strong difference but larger groups are certainly not less cooperative

11 Would providing more disaggregated information help? In many social dilemma experiments we provide the participants information about average contributions for the group What if we showed them contributions made by individuals without revealing their identity? Turns out the this increases free-riding!

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13 Communication & Voluntary Cooperation Groups of four Two sequences with 10 periods each Group composition remains unchanged for the duration of the session. Communication opportunities: Players can discuss what they want to do in the experiment.

14 Communication & Voluntary Cooperation: Treatments 1. Communication for 10 periods followed by No Communication for the next 10 periods (players have the same endowment.) 2. No Communication for the first 10 periods followed by Communication in the next 10 (players have the same endowment) 3. Communication followed by No Communication (asymmetric endowments).

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16 Findings Start with Communication High cooperation rates; also in the second No Communication phase. Start with No Communication Unraveling of cooperation in No Communication but after Communication rapid increase in cooperation.

17 Cooperation, Punishments and Social Norms A social norm is a behavioral regularity that rests on a common belief of how one should behave and might be enforced by formal or informal sanctions.

18 A cooperation and punishment experiment (Fehr and Gächter, 2000) Stage 1: typical public goods game Stage 2: Punishment opportunity Subjects are informed about each member’s contribution. Subjects can punish other group members at a cost to themselves.

19 A cooperation and punishment experiment Either groups are fixed – “partners” protocol Or players are randomly re- matched at the end of each round – “strangers” protocol

20 Predictions If players are selfish and interested in maximizing their earnings then: No punishment No contribution regardless of whether there is a punishment opportunity.

21 Predictions Players in the partner treatment who interact with the same people over and over again may be able to build up a group reputation “There are punishers in the group, hence it is better to cooperate” Building such reputation would be difficult with random re-matching where the interactions are short-lived

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23 (18.5%)(57.5%) (9.5%)(61.5%)

24 Who gets punished?

25 Even non-monetary punishments (scolding?) seem to matter! David Masclet and others look at a “partners” treatment where participants play for 30 periods divided into 3 segments No sanction (periods 1 through 10) Monetary Sanction OR Non-Monetary Sanction (Periods 11 through 20) No sanction (Periods 21 through 30)

26 Group Contributions Over Time Monetary punishment Non-monetary punishment

27 Formal vs. Informal Sanctions The availability of either type of sanctions increases contribution levels. The availability of non-monetary sanctions initially increases the contribution levels of subjects by as much as monetary sanctions. The increase in contribution resulting from non-monetary sanctions is not as durable as the increase from monetary sanctions.

28 How effective are non-monetary punishments? Monetary punishment alone is a blunt tool to raise contributions than needed. A wider array of sanctions is more effective. For many people, non-monetary sanctions are sufficient to induce high contributions. Costly monetary punishments can be reserved for those that informal sanctions cannot influence.

29 Are punishments essential? Creating culture in the laboratory A group of 5 subjects play the public goods game for 10 periods. After her participation, each agent is replaced by another, who plays the game for 10 periods again.

30 The Inter-generational paradigm Players in any generation can leave free-form written advice to their successors Players get two payoffs – what they earn plus what their progeny earn

31 Three Different Advice Treatments In the private advice treatment advice from generation “t” player is given only to her successor in generation “t+1” In the public advice almost common knowledge treatment advice from all players in generation “t” is given to all the players in generation “t+1”

32 Three Different Advice Treatments In the public advice common knowledge treatment advice from all players in generation “t” is given to all the players in generation “t+1”and is also read aloud by the experimenter The advice treatments are compared to behavior in a control group

33 The Inter-generational Paradigm In real-life when we are confronted with a social dilemma we often access to the wisdom of the past in the sense that predecessors, or at least immediate predecessors, of this person are available to give us advice.

34 Pattern of Contributions Common Knowledge advice No advice Private advice

35 Evolution of Contributions Across Generations – Private Advice

36 Evolution of Contributions Across Generations – Private Advice

37 Evolution of Contributions Across Generations – Private Advice

38 Contributions Across Generations – Almost Common Knowledge

39 Contributions Across Generations – Almost Common Knowledge

40 Contributions Across Generations – Almost Common Knowledge

41 Contributions Across Generations – Common Knowledge

42 Contributions Across Generations – Common Knowledge

43 Contributions Across Generations – Common Knowledge

44 Role of Advice Subjects were asked to indicate a specific contribution in addition to providing free-form advice Often, advice specified a dynamic rule: “I would pick a high number for the first round like 9. But when you see the average start to drop, pick a small number so you don’t lose money.”

45 Role of Advice In the later generations of common knowledge public advice, subjects advised unconditional contribution: “Keep faith! No one should mess it up for the others. All 10 for all 10 rounds!” “For goodness’ sake don’t be that morally vacant girl who prioritizes her own profit & takes advantage of everyone else!”

46 Histogram of Advice Left – Private Advice

47 Histogram of Advice Left – Private Advice

48 Histogram of Advice Left – Private Advice

49 Histogram of Advice Left – Almost Common Knowledge

50 Histogram of Advice Left – Almost Common Knowledge

51 Histogram of Advice Left – Almost Common Knowledge

52 Histogram of Advice Common Knowledge

53 Histogram of Advice Common Knowledge

54 Histogram of Advice Common Knowledge

55 Beliefs We elicit subjects’ beliefs about round 1 contributions made by each member of the group Common knowledge generates much more exhortative advice This in turn creates more optimistic beliefs

56 Implication for the punishments literature In the presence of conditional cooperators, communities may be able to create social norms that lead to high contribution to the public good. Subjects with optimistic beliefs about one another may be able to sustain cooperation even without the explicit threat of punishments.

57 Questions?