Complexity, Uncertainty, and the Emergence of Cooperation

June 15, 2008

Complexity, Uncertainty, and the Emergence of Cooperation

The bigger picture: How can we explain prosocial behavior?

Firms form groups to increase their competitive advantage by gaining new knowledge. Working isolated they might not be able to generate new knowledge because of path-dependencies and lock-ins. Examples of groups are clusters, networks, strategic alliances, joint ventures etc., that is a group is composed of two or more members who are convinced that the benefits from working together are greater than the benefits from working alone

Within a group they face a Prisoner’s Dilemma. Agents have always an incentive to defect. There is strategic uncertainty and suboptimal outcomes are likely. We distinguish two ways to solve the dilemma: (1) centralized, power-based solutions, and (2) self-organized, decentral solutions.

The Prisoner’s Dilemma
Player 2
Player 1 C R,R S,T

Consider an ALL D and a TFT player in an infinitely repeated game. We can derive an inequality (see handout) which tells us under which conditions cooperation becomes logically possible. What matters are incentive structure (T,R,P) and the agents’ discount factors. But depending on the agents’ beliefs almost any outcome is possible (Folk Theorem).

(1) The power-based, centralized solution: A central authority (principal) is created who monitors behavior. Rules and sanctions are established and enforced by the central authority. The payoff matrix is transformed. But there are two problems:
1. Due to asymmetric information monitoring is impossible. Contracts are not enforceable.
2. Agents are directed by the central authority. This threatens their personal sense of autonomy and reduces intrinsic motivation.

(2) The self-organized, decentral approach: Socio-economic conditions favorable to cooperation can be created through the buildup of trust. Trust is buildup in a cumulative process if both players cooperate in repeated encounters. This explains the reproduction of trust, but it cannot tell us why trust emerges. In order to explain why player 1 should cooperate in the first place we need additional assumptions.

Trust Game

We need to know if player 1 considers player 2 to be trustworthy. Frequent social interactions among group members and intense communication reduce social distance and create a group-identity, resulting in organizational identification. Also, the behavior of leaders and players with high prestige gets imitated and induces cooperative behavior. Feelings of trust and reciprocity are buildup, so player 1 starts cooperating as a result of intentional and unintentional social learning.
If rules do not reduce self-determination and undermine intrinsic motivation, they can facilitate the formation of trust by reducing the possible loss for those who extend trust.

Agent-based model: Firms search for more efficient technologies in a complex and uncertain environment. A firm can either search alone or in a group. We assume that within a group agents have solved the Prisoner’s Dilemma, i.e. they cooperate. With increasing complexity and uncertainty search gets more difficult. The comparative advantage of firms being in a group relative to firms not being in a group increases with complexity and uncertainty. Put bluntly, there is more to be gained by joining a group (R increases), but also the temptation to defect (T) increases.

As a next step we will drop the assumption that agents cooperate and implement mechanisms of social learning and group formation. This allows us to explore the relationship between complexity, group size, and cooperative behavior.

Conclusion: Besides incentive structure, discount factor, and length of interaction, trust is a crucial explanatory variable for the emergence of cooperation. Since trust makes cooperation possible but goes beyond strict rational economics, approaches that take institutional embeddedness into account are necessary. Institutions that solve the Prisoner’s Dilemma are established practices to cooperate, which come from the social domain. Further research should focus on the process of cultural selection, especially learning and imitation.

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