Games involving cooperation

Learning outcomes:

1. By the end of today’s lecture you will have learnt something about games
involving cooperation such as,
1. Prisoner’s dilemma
2. Public goods
3. Voluntary contribution games
 Introduction
• We’re interested in this type of games because they require cooperation to produce
efficiency.
• For each person there is a dilemma – whether to contribute to the social good or to
be selfish.
• In real life they are many examples where there is such a dilemma:
– Fishing
– Fighting crime, picking up litter
– Exploitation of common resources
– Environmental protection
– Teamwork in organisations
– Charitable work
• Experiments are useful because they can help us identify conditions under which
cooperation is sustainable
 Prisoner’s dilemma – a reminder
Column
Each player has two strategies Coop Cheat
Cooperate or cheat
Row Coop 3,3 0,4
Cheat 4,0 1,1
The payoffs of the Row player are shown first.
If players are selfish (care only about their own payoffs), then the dominant
strategy is to cheat.
The predicted outcome is (Cheat, Cheat)
 Prisoner’s dilemma – more generally

Column
Each player has two strategies Coop Cheat
Cooperate or cheat
Row Coop a,a 0,b
Cheat b,0 c,c
Note that the prediction is not sensitive to the numbers. As long as a<b and 0<c,
then the predicted outcome is (Cheat, Cheat)
And as long as c is smaller than a, the predicted outcome is Pareto inefficient –
cooperation would pay each player more.
 Public Goods
• Recall that public goods have two key characteristics:
– Non rivalry
– Non excludability.
• It’s the second feature that makes voluntary provision of public goods problematic.
• People who do not contribute cannot be excluded from their consumption, so there
is an incentive to free ride on others’ contributions.
• If there is free-riding there will be an inefficiently small amount of voluntary public
good provision
 Voluntary contribution games.
• In real life public goods are goods…
• It’s difficult to identify the marginal private benefit from public good consumption.
• It is therefore difficult to identify what is efficient and inefficient.
• So in the laboratory we usually create artificial public goods – using money.
• We have a fixed number of players, n.
• We give each player an endowment of money, E.
• They decide how much to keep, yi
• And how much to invest in the public good, gi
• Obviously, gi + yi = E
• Typically, the contributions are added up to produce a total contribution level, G.

G   gi
i
 Voluntary contribution games.
• The total is then multiplied by a factor m>1. Each player then receives a fraction 1/n
of the total.
m m
G    g i
n n i
• Payoffs for individual k are therefore:
m
xk  E  g k     g i
n i
 Voluntary contribution games.
• Payoffs for individual k are therefore:
m
xk  E  g k     g i
n i
• A selfish person cares only about their own payoffs. They choose g k to maximize xk..
Now
xk m
 1   
g k n
1. this does not depend on other people’s behaviour at all.
2. it does not depend on gk either.
3. So the individually optimal solution is to put all the money into the public good or
keep all the money out.
4. If m>n, then the optimal strategy for a selfish player is to set gk=E
5. If m<n, then the optimal strategy for a selfish player is to set gk=0
 Game solution
• This is the Nash equilibrium solution (“free riding” behaviour)
• In fact in this design it is also the dominant strategy.

The Pareto Efficient outcome.

• If all players put all their money into the public good, the payoffs for individual k are
:
m
xk  E  E    E  mE
n i
• Since m>1, then the efficient solution is to put all the money into the public good,
whatever the value of n.
 Designing a group of experiments

• Obviously we are interested in the basic game, but we are probably more
interested in other issues:
• Learning – how do players learn how to play the game
• Repetition – does it make a difference if we play the same people
repeatedly
• Group size – does it make a difference to free-riding
• Social context – does it make a difference if play is anonymous or the players
know each other.
• Social norms – what impact does advice have
• Gender and cultural variables
• Endogenous groups – does it make a difference if we choose our team?
• Punishment – if players can punish each other for not cooperating does this
make a difference?
 Economists free ride..

• The original experiment on VCMs is probably that done by Marwell and Ames
(Economists free ride. Does anyone else?’ Journal of Public Economics, 1981),
• They used high-school students, contacted by phone and in malls.
• The games were one-shot and the students were told that they were in
varying sizes of groups (in fact they weren’t).
• In some versions of the game, there were multiple equilibria.
• Around 57% of endowments were invested in the public good.
 A typical experiment

• Typically,
– n is small (e.g. n=4)
– We recruit some multiple of 4 players e.g. 12 or 16.
– The game is played with computers. Players are screened from one
another and not allowed to communicate
– It is played T times
– After each round, players are randomly matched again. So you might be
playing the same people again. You might not.
– After each round you are told your payoff (and reminded of your
contribution).
– Monetary payoffs equal the total payoff across all rounds.
– Sometimes laboratory money is used (“thalers”) which is then converted
into currency at the end.
• What do you think happens?
 Do people contribute to the Public Good?
• This PG game (Fehr &
Gächter, 2000) has
n=4, E=20, m=2.5
• Subjects start giving about
40-60% but then
contributions quickly drop;
• in the last period, most
subjects free ride
• In this experiment the
authors are interested in how
behaviour is different with
fixed matching
• With fixed matching people
give more than with random
matching.
• Note that in order to derive
conclusions about the effects
of matching, they have to
have 2 treatments
Cardenas and Carpenter survey some cross cultural evidence
• http://www.middlebury.edu/NR/rdonlyres/64DC78BC-D459-48D1-A160-ECDE5B370EA2/0/0505.pdf
• On the whole students (where the 4th column says ‘yes’) are more selfish but there isn’t
an obvious cross-cultural pattern
 Other Factors Affecting Public Good Provision

• Group size n: lower mean contributions with higher n (keeping n/m constant).
more provision with higher m.
• Group or social interaction improves provision of PG (e.g. in an experiment in
Ugandan we find husband-wife pairs contribute about 75% of endowment to
a public good).
 Theorising about the results.
• In the long run most contributions tend to zero, but still in many cases g>0.
• Why?
1. Kindness (altruism)?
2. Confusion (mistakes)?
•
• Let’s take explanation (2) first.
• Players might play g = g*+ε, where ε is some error and g* is ‘optimal choice’.
• the optimal contribution for a selfish player is zero.
• on the boundary of the contribution set.
• So, ε≥0 = error is one-sided. Consequently, in the face of mistakes, the mean
recorded contribution is expected to be positive and this might be mistaken for
altruism or some other motive.
 Theorising about the results.
• Dealing with confusion.
1. Train people more carefully
2. Allow more rounds of the game to encourage learning
3. Redesign the game so that, for a selfish player x* >0
4. Redesign the game so that there are treatments where the kindness motive is
absent and compare. [Andreoni (American Economic Review, 1995) ]
 Theorising about the results.
• Possibility 3: Redesign the game so that, for a selfish player x* >0#
• E.g:
2
   
xk  E  g k     g i      g i 
e.g. Isaac & Walker, 1998,
 i   i 
 Isaac Walker 1998.

• Generally, in their results,

contributions are below the Nash
equilibrium!
• But some variation (see bottom
example)
• Implication of this literature is
– behaviour is correlated with
Nash
– But deviates from Nash,
usually
– Evidence for both confusion
and kindness
 Modelling kindness.
• Non-zero contributions in these games not just due to confusion
• altruism is the property that individuals care positively about other people’s
payoffs.
U i  U ( xi , x i )
• Here x-i is the (n-1) vector of payoffs for other players. If U is increasing in x -i then
person i is an altruist.
 Modelling kindness. Warm glow altruism
• In warm glow altruism, individuals receive pleasure from giving,
– not from the payoff or well-being of others.
• ‘warm glow’ is a feeling of satisfaction, pride and so on that we get from doing a
good thing.

U i  U (yi , G, gi )
• y= private good consumption.
• G= public good consumption and
• the third term is contributions to the public good by person i.
• In the model, utility is non-decreasing in all three arguments.
 Modelling kindness. Warm glow altruism
• Let G-i be contributions to the public goods by others, then

U i  U (yi , G i  g i , gi )
• Compare this to selfish preferences or standard altruism where:

U i  U (yi , G i  g i )
 Why ‘warm glow’
• Standard altruism/selfish preferences has three key predictions

U i  U (yi , G i  g i )
1. G-i and gi are perfect substitutes. Cet. Par. A rise in G-i by one unit should be
completely offset by a fall in gi of one unit.
dgi
 1
dG i U const
2. A transfer of income between individuals who both contribute to the public good
leads to no change in G. (Warr’s Theorem)
3. If G is normal, an increase in the number of (identical) players lowers individual
contributions.
 Why ‘warm glow’

1. In many experiments, it seems that dgi

0
dG i
– we get crowding in rather than crowding out.
2. Prediction 2 performs okay in the lab: (e.g. Maurice, J., Rouaix, A., & Willinger, M.
(2013). Income redistribution and public good provision: an experiment.
International Economic Review, 54(3), 957-975.)
3. In lab experiments, g falls but not very quickly.
– More generally, for reasonable models, g falls quickly with n and it is
therefore hard to understand how any individual makes a contribution to a
real world public good (where n is often in the millions).
Basically people don’t ‘free ride’ as much as predicted.
Warm glow can explain point 3.
 Heidi Crumpler , Philip J. Grossman . Warm glow experiment

1. Subjects have endowment

2. Choose preferred charity (i.e. a public good) and then how much to ‘donate’
3. BUT:
4. “The amount contributed by the proctor to your selected charity WILL be reduced
by however much you pass to your selected charity. Your selected charity will
receive neither more nor less than $10.”
1. (proctor is a person in the room, not the experimenter).
5. So, dG
0
dgi

6. Let E = endowment = gi + yi If preferences are selfish or standard altruism:

U i  U (E  g i , Gi  g i )
 Heidi Crumpler , Philip J. Grossman . Warm glow experiment

1. So,

dU i U (E  g i , G i  g i ) U (E  g i , G i  g i )  dG 
   
dgi yi G  dg i 

2. But,
dG
0
dgi
3. Hence:
dU i U (E  g i , G i  g i )
 0
dgi yi

4. i.e. optimal contribution for selfish or altruist is zero. Only the ‘warm glow’
person should contribute.
Over half the subjects make positive contributions of some kind.

Fig. 1 Distribution of donations as a percentage of endowment.

 Limitations of ‘warm glow’

1. In many experiments, it seems that dgi

0
dG i
• we get crowding in rather than crowding out.
– Warm glow cannot explain this.
– Selfish preferences cannot explain this
– Altruism cannot explain this.
 Reciprocity & conditional cooperation

Conditional cooperation. if people can condition their PG contribution on others’

contributions, they often provide more.

A repeated public good games experiment

Here avercontt-1 is the average contribution by others in the previous round.
The coefficient is an estimate of dgi
dG i

Voluntary contribution mechanism (Croson et al paper)

Original Restart
Constant 15.113** (3.330) 15.508** (4.084)
AverContt−1 0.402** (0.118) 0.415** (0.150)
Period −1.062** (0.283) −1.319** (0.331)
Individual dummies Yes Yes
R2 0.6339 0.5299
 Reciprocity & conditional cooperation

• Fischbacher et al 2001, who use a strategy method in which subjects state their
willingness to contribute conditional on the mean contribution of the other group
in a one shot game.
• Exactly 50% of subjects are conditionally cooperative, 30% are complete free riders
and the other large group are labelled as ‘hump-shaped’ because their
contributions show evidence of both reciprocity and free-riding.
 How do real societies in history manage to cooperate?

• In the real world individuals can often communicate their approval or

disapproval of others actions.
• Recent research suggests that punishment might be important: if cooperative
subjects can punish free riders, the decline can apparently be avoided, even if
punishments are costly
 Punishments in PG Goods: Fehr & Gächter
• First stage: Contribution (as in the normal PG game), followed by information
on individual contributions
• Second stage: Punishment, (decision: how much to punish?) where pij are the
number of “punishment points” player i assigns to player j
• Cost of punishments:
– 1 punishment point reduces the punished player’s income by r points.
– in Fehr & Gächter, r=3
• This gives final monetary payoffs:
m
xk  E  g k    g i   p ki  r  p ik
• n i i i
For selfish players, the Nash equilibrium is to free ride and not to punish
• But if r is large enough, then punishment may reduce inequality
• Someone who is inequality averse may therefore choose to punish even if it has
no future consequence.
• Subjects may also punish to teach lessons to free-riders.
 Punishments in PG Goods: Results
• In periods 1-10, there are no punishments
• In periods 11-20, punishments are available
• With punishment, cooperation is higher (even with random matching)
 Interpretation

• It’s rather strange to find punishment with random matching.

• There is some recent brain scanning (MRI) research (Fehr et al., Science 305,
2004) showing an apparent neural basis for punishing behaviour. Apparently,
“revenge is sweet”, that is, people “enjoy” the punishments even though they
are costly
• This does not mean such pleasure is genetic: it may vary between cultures.

• N.B. in ‘neuroeconomics’ subjects make decisions or play games inside a brain

scanner. Researchers observe the part of the brain that lights up as different
tasks are undertaken.
• They correlate the results with those from other tasks
 Herrmann: some cross cultural evidence
• Punishment games.
• Left hand side is interesting because it suggests that above average
contributions are also punished in many groups
 An Experiment with Counter-Punishments
• However, punishment can
escalate:
• Nikiforakis (2004) uses the
same game as Fehr-Gachter
but with counter-
punishments and random
matching;
• the positive effect is almost
completely gone
 Social disapproval may not involve punishment.

• Carpenter and Seki, run an interesting experiment amongst fishermen in

Toyama prefecture.
• Subjects are 56 shiroebi fishermen. Around half the sample are drawn from a
traditional group where all fishing proceeds are pooled.
• Around half are independent fishermen, who do not pool proceeds with
other boats.
• It is noteworthy that income is higher for the pooling boats – i.e. there is no
field evidence of free-riding.
• N=4, E = 500 yen per round, m = 2.
• After five rounds a sudden change is introduced: after the result of each
round subjects may purchase for 10 yen an ‘unhappy face’ coin which is
shown to other members of the group anonymously.
• Contribution levels are higher than with a control group of students.
• Pooling and nonpooling fishermen do not differ in rounds 1-5, but once social
approval is introduced
• Pooling subjects contribute more.
 Threshold public goods and designing mechanisms

• A response to free riding is to try to devise mechanisms that avoid it.

• For instance, a threshold public good is one where total contributions must
meet some level (e.g. T) below which there are no public benefits.
• Many public goods have this feature (a new theatre, flood defences)
• Payoff for person i:
• -cj if Contributions
• by others are hi
-cj +
• Where f is a positive and increasing function.
payoff Low
• In the diagram, f is linear, with df/dc < 1.
• Threshold public goods typically have multiple Nash equilibria, some of which
involve provision of the good.
 Designing mechanisms

• In this example contributions are not returned. The strategy space is

continuous, but I have shown 3 illustrative actions to show the idea
• T is the threshold, E is the endowment, m is the multiplier
• There are still 2 symmetric pure strategy Nash equilibria if m>1:
Column

0 T/2-ε T/2

0 E, E E, E- T/2+ε E, E- T/2

Row T/2-ε E- T/2+ε, E E- T/2+ε, E- T/2+ε E- T/2+ε, E- T/2

T/2 E- T/2, E E- T/2, E- T/2+ε E+(m-1)T/2, E+(m-1)T/2

• Field experiment: List, John A., and David Lucking‐Reiley. "The effects of seed money and refunds on
charitable giving: Experimental evidence from a university capital campaign." Journal of Political
Economy 110, no. 1 (2002): 215-233.
 Summing up.

• Public goods/ VCMs are probably the most (over)-researched experiments.

• Current interest:
– Retaliation, and counter punishment, social norms
– Robustness across societies and groups.
– Connecting behaviour in one type of game to behaviour in other games
– Field experiments - especially on charitable contributions
• Good practice
– Replication of existing treatments as a baseline
– Tests of understanding for subjects.

Gächter, Simon. "Conditional cooperation: Behavioral regularities from the lab

and the field and their policy implications." In Psychology and economics: a
promising new cross-disciplinary field (CESifo Seminar Series), pp. 19-50. 2007.
 Summing up II.

• Public goods results have given rise to a number of new theories.

1. Warm glow
2. Fairness
3. Reciprocity
 Questions.

1. Consider a public good game with n=2, E=2000, m=1.5. Derive a 2x2 payoff
matrix with the two actions “fully contribute” and “fully free ride”. What do you
obtain?
2. Punishment for punish free riders in PG games is perhaps not very surprising
with fixed matching. Why is it more surprising with random matching? Is it
completely irrational?
Experiments
• We will (try) to use ClassEx
• This is an online site for experiments.
• Using your computer or a smartphone please navigate to https://classex.de/
Please navigate to https://classex.de/

• Using your computer/smartphone click on the green button or the login button
You’ll see a display that might be in German! (You might want to click the OK
button to stop it nagging you about cookies).
• Where is says ‘Uni Passau’ there’s a drop down list of universities by country.
• Under Japan, choose GRIPS
• Now everything should switch to English.
Please navigate to https://classex.de/

• Enter the password: econ4grips and then click login

• We are ready to begin.