Tuesday, April 18, 2006

Fairness and Reciprocity

In class yesterday, we discussed how dense social networks promote cooperation (and discourage free-riding) by increasing observability and by increasing the threat of punishment (because people caught violating norms and/or free riding stand to suffer greater losses to their social capital when social networks are more dense). Ernst Fehr and Simon Gaechter are two of the big names in this area. A summary piece describing the results of their various public goods experiments that show that observability and enforcement promote cooperation in public goods experiments can be found here. As the abstract below points out, the paper also describes some additional experiments which show that formal contracts can reduce output by crowding out cooperative motivations (leading to a situation where employers actually prefer incomplete contracts).

Abstract: This paper shows that reciprocity has powerful implications for many economic domains. It is an important determinant in the enforcement of contracts and social norms and enhances the possibilities of collective action greatly. Reciprocity may render the provision of explicit incentive inefficient because the incentives may crowd out voluntary co-operation. It strongly limits the effects of competition in markets with incomplete contracts and gives rise to noncompetitive wage differences. Finally, reciprocity it is also a strong force contributing to the existence of incomplete contracts.

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