DP6534 The Scope of Cooperation: Values and incentives

Author(s): Guido Tabellini

Publication Date: October 2007

Keyword(s): cooperation , cultural transmission , culture , institutions

JEL(s): A10 , A14

Programme Areas: Development Economics , International Macroeconomics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP6534.asp.asp

What explains the range of situations in which individuals cooperate? This paper studies a theoretical model where individuals respond to incentives but are also influenced by norms of good conduct inherited from earlier generations. Parents rationally choose what values to transmit to their offspring, and this choice is influenced by the quality of external enforcement and the pattern of likely future transactions. The equilibrium displays strategic complementarities between values and current behaviour, which reinforce the effects of changes in the external environment. Values evolve gradually over time, and if the quality of external enforcement is chosen under majority rule, there is hysteresis: adverse initial conditions may lead to a unique equilibrium path where external enforcement remains weak and individual values discourage cooperation.