Game Theory 10: Cooperative Structures


Throughout this section of the course , we have been talking about cooperation and different aspects of the social dilemma. In this video, we will look at various approaches that have been identified for fostering the cooperation required to overcome this core constraint.

Our capacity to solve the social dilemma in various ways is a defining factor in the strength of individual relationships, social organizations, economies, and society at large and is thus a topic that is of great interest to many.

Depletion of natural resources, pollutants, and intercultural conflict, can be characterized as examples of social dilemmas.

Social dilemmas are challenging because acting in one’s immediate self-interest is tempting to everyone involved, even though everybody benefits from acting in the longer-term collective interest. Thus some form of cooperative institutional infrastructure is required to enable the cooperation required for sustained success.

The empirical fact that subjects in most societies contribute anything in the simple public goods game, that we looked at previously, is a challenge for game theory to explain via motives of total self-interest. But as we have noted one of the defining features to human beings is their extraordinarily high level of cooperative behavior. Cooperation is a massive resource for advancing individual and group capabilities, and over the course of thousands of years, we have evolved complex networks for collaboration and cooperation which we can call institutions of various form.

These institutional structures help us to solve the many different forms of the tragedy of the commons that we encounter within large societies.

As we have touched upon previously, the central issue of the tragedy of the commons is externalities. That is to say, that the actions that the individual takes have costs that the person does not fully bare, as they are externalized to the overall organization. If there are then too many negative externalities and not enough positive externalities the organization will degrade over time. The central issue in solving the tragedy of the commons is then in reconnecting the costs of the individual’s actions on the whole with the costs that they pay. When the individual always pays the full costs for their actions then there is no social dilemma and we have a self-sustaining organization.

This may sound simple in the abstract, but in practice, it is not simple at all, and this is one reason why we have such a complex array of economic and social institutions. How we approach doing this though, depends on the degree of interconnectivity and interdependence between the players in the game.


When there is low interconnectivity, then there will likely be low interdependence, which means a high probability for negative correlations between actors.

When actors are independent then they can do things that affect the other without that effect returning to themselves.

For example, if I live in Germany and pollute the atmosphere so that there is acid rain in Sweden, as long as I never go to Sweden then what happens there does not affect me too much and this negative correlation can exist.

Now if we turn up the interconnectivity and interdependence, this changes the dynamic. Say I have business partners in Sweden and happen to go on holiday there also. Due to this interconnectivity and interdependence there is a much greater possibility for a positive correlation between my experience and what happens in Sweden. This interconnectivity and interdependence means that I increasingly have to factor my negative externalities into my cost-benefit equation.

The central importance of interdependence as a parameter in cooperation can be simply seen in the way that people cooperate more with those that they are closely connected to; more than with those that are of a different group, culture or society that they are not connected with.

Thus, how we go about solving the social dilemma depends on the degree of interconnectivity and interdependence within the dynamic. At a low-level, cooperative structures have to be imposed through regulation, while at a high level this is no longer necessary as the interconnectivity and interdependence can be used to create self-sustaining cooperative organizations. This is illustrated by how different cooperative structures have evolved within society. Those within small closely interdependent groups like the family and those that have formed for larger society that is composed of many groups that are more independent.

This is to a large extent part of what has happened as we have gone from small, pre-modern societies to large modern societies. As the scale of the social systems that we are engaged in has increased the interconnectivity and interdependence between any two random members has decreased – because they are farther apart in the network. Thus this has disintegrated traditional cooperative institutions that are based on local interactions and interdependencies.

In the absence of tools for interconnecting everyone within a large national society, we have had to create the formal centralized regulatory institutions of the nation state.

And of course, with the rise of information technology and globalization, this is once again changing as we create social interdependencies that span the entire planet.


The most manifest and obvious form for enabling cooperation is regulation and rules that are imposed on the social system by a third party to ensure behavior that is of benefit to the group. The aspect of cooperation examined in many experimental games is cooperation that occurs when people follow rules limiting the exercise of their self-interested motivations.

People might want to take from a shop without paying, but are required to abide by the law, they may want to fish in a lake, but limit what they catch to the quantity specified in a permit.

They buy a fuel efficient car because of regulation taxing the sale of inefficient cars.

In all of these situations, people are refraining from engaging in behavior that would give them immediate benefit but is against the welfare of the group.

Regulation involves limiting undesirable behavior.

This method for enabling cooperation through regulation and rule adherence is deeply intuitive to us and often the default assumption as to how we might achieve cooperation.

The central aim of regulation is to connect the individual’s externalities with the costs and benefits they pay by imposing extra costs on them for certain negative externalities, while providing them with subsidies and payments for certain activity that generates positive externalities.

This form of solution for enduring cooperation through an external third party that imposes sanctions or rewards can be very effective in situations of independence between members.

For example, this would be a good solution to the prisoner’s dilemma where the members can not communicate with each other and are otherwise independent. By forming a third party that could impose sanctions on them, we could change the payoffs in the game to enable cooperative outcomes.

Although the regulatory approach is simple and straightforward, the development and maintenance of this external organization have overhead costs. It is also prone to corruption and has other limitations to it.

Studies have been conducted into the success of the establishment of a leader or authority to manage a social dilemma. Experimental studies on commons dilemmas show that over-harvesting groups are more willing to appoint a leader to look after the common resource.

There is a preference for a democratically elected prototypical leader with limited power especially when people’s group ties are strong.

When ties are weak, groups prefer a stronger leader with a coercive power base.

The question remains whether authorities can be trusted in governing social dilemmas and field research shows that legitimacy and fair procedures are extremely important in citizen’s willingness to accept the authority.

Furthermore, the formal governance structures of a police force, army, and judicial system will fail to operate unless people are willing to pay taxes to support them. This raises the question if many people want to contribute to these institutions.

Experimental research suggests that particularly low-trust individuals are willing to invest money in punishment systems.

The political economist Elinor Ostrom won a Nobel laureate for her studies of various communities around the world and how they managed to develop diverse institutional arrangements for managing natural resources, thus avoiding ecosystem collapse. She illustrated how communities can be managed successfully by the people who use them rather than by governments or private companies. In an interview talking about this centralized regulatory approach, she had this to say about it: “for some simple situations that theory works and we should keep it for the right situation, but there are so many other rich solutions.”


When interconnectivity between members within a game increases, so typically does interdependence and this changes the nature of the game.

Externalities are things that we can put external to our domain of value and interest, but interconnectivity reduces the capacity to do this.

One good example of this is the warning signs on the side of cigarette packets that makes you aware of the negative externalities of smoking on your body. They are trying to connect you with the negative externality that you are creating so that you recognize your interdependence and factor it into the equation under which you are making your decision to smoke.

Thus we can see an externality is not necessarily something that is far away, it is simply whatever you exclude from your value system so that reducing it has no reduction to your payoff. But connectivity takes this barrier down requiring us to recognize the value of the other entity and factor it into our decision. This connectivity can be of many different kinds.

Communication is a form of connection that can enable positive interdependence and there is a robust finding in the social dilemma literature that cooperation increases when people are given a chance to talk to each other.

Cooperation generally declines when group size increases. In larger groups, people often feel less responsible for the common good, as they are more removed from it and the other people with whom they share it.

Thus we can see what is really at the core of the social dilemma is the question of what people value and how far that value system extends.

Wherever we stop seeing something as part of us or our group, that is where negative externalities accumulate and start to give us the social dilemma. However, by building further connections so that people recognize their interdependence with what they previously saw as external, they will start to factor it into the value system under which they are making their choices and reduce their negative externalities. From this perspective, the issue is really one of value and externalities.

Connectivity can change that equation, working to internalize the externalities. Connectivity though is just an enabling infrastructure, one still has to build the channels of communication and structures that enable positive interdependence.

Building systems of cooperation in such a context means enabling ongoing interaction, with identifiable others, with some knowledge of previous behavior, lists of reputations that are durable and searchable and accessible, feedback mechanisms, transparency etc. These are all means of fostering positive interdependence once interconnectivity is present and through them, self-regulating and sustainable systems of cooperation can be formed.

If we think back to the public goods game, if the amount contributed is not hidden, then players tend to contribute significantly more. This is simply creating a transparent system where there is feedback.

As another example, we could think of eBay. EBay is really a huge social dilemma game. You would not send money before receiving the item nor would the other party send the item before receiving the money, so why has eBay succeeded? Not because eBay is going to throw you into jail if you don’t play nice, it is because of communication, transparency and feedback mechanisms that build positive interdependence.

This interconnectivity that builds positive interdependence is not just in space but also in time. Probably the single biggest difference in the prisoner’s game is whether it is a one-off or recurring game that is being played. And it is to this topic of games that play out over time that we will turn to in the next section.