Unit 4 Strategic interactions and social dilemmas

4.10 Cooperation, negotiation, and conflicts of interest

Participating in a common project that is intended to produce mutual benefits.

Cooperation means participating in a common project in such a way that mutual benefits occur. It need not be based on an agreement. Players acting independently may choose to behave cooperatively because of the following:

  • They have social preferences: they are altruistic, or have a preference for fairness, or wish to reciprocate cooperative behaviour by others.
  • Their behaviour is guided by social norms: shared understandings that people in certain situations should cooperate, and behave well towards each other, or that resources should be allocated fairly.
  • They interact with each other repeatedly, allowing behaviour today to be rewarded, reciprocated, or punished in future.

In other cases, such as the one-shot prisoners’ dilemma, independent actions lead to an outcome that is not Pareto efficient. Then, the players may be able to achieve an outcome that everyone would prefer if they can reach an agreement. Anil and Bala might be able to agree that both would use integrated pest control, but they would need to find a way of ensuring that neither reneged on the agreement.

People commonly resort to negotiation to solve their economic and social problems. For example, international negotiation resulted in the Montreal Protocol, an agreement to eliminate the use of chlorofluorocarbons (CFCs), in order to avoid a harmful outcome (the destruction of the ozone layer).

But negotiation does not always succeed, often because there are different ways of cooperating, each benefiting some players more than others. So there may be conflicts of interest over how the mutual gains from cooperation will be shared. Negotiation involves bargaining over what each party will contribute, and what benefits they will receive.

For example, consider a professor who would like to hire a student as a research assistant for the summer. In principle, both have something to gain from the relationship: the student would receive some money, and useful experience. There is potential for mutual benefit, but also room for conflict. The professor may want to pay less and have more of his research grant left over to buy a new computer, or need the work to be done quickly; the student may want time for a holiday. Maybe they will negotiate a compromise in which the student can earn a small salary while working from the beach. Or, perhaps, the negotiation will fail.

There are many situations like this in economics. Bargaining is an integral part of politics, foreign affairs, law, social life, and even family dynamics. A trade union may be willing to accept new working practices in return for a pay rise, housemates might reach an agreement on how to share the chores, or a government could negotiate a deal with protesters to avoid political instability. As with the student and the professor, each of these bargains might not actually happen if they cannot find a deal that suits both sides.

Sharing mutual gains: The role of social norms and social preferences

Consider the following bargaining problem. You and a friend are walking down an empty street and you find a $100 note on the ground. What would you do with your lucky find?

conflict of interest
The situation that arises in an economic interaction if in order for one party to gain more, another party must do less well.

You will probably find a cooperative—and Pareto-efficient—outcome, in which you share the $100 between you (rather than leaving it on the ground, or destroying the note by fighting over it). But there are different ways that you could share it, and a conflict of interest between you about which one to choose.

Social norms and social preferences help players to cooperate in prisoners’ dilemmas or public good games; they could also help you to reach a mutually acceptable bargain.

Perhaps there is a social norm in your community that says that something you get by luck should be shared equally. Then if you suggest a 50-50 split, you know that your friend is likely to agree.

Norms provide a starting point for bargaining. But we would expect that, even if there were a 50-50 norm in a community, some individuals might not respect the norm exactly. Some may act more selfishly than the norm requires and others more generously. What happens then will depend both on the social norm, and on the specific preferences of the individuals concerned.

A similar social norm is expressed ‘Possession is nine-tenths of the law’. The next line of the children’s rhyme ‘Finders, keepers’ is ‘Losers, weepers’, meaning that, in the case of accidental losses, the loser cannot expect the loss to be shared by others.

Suppose you saw the money first and have picked it up. A social norm of ‘finders, keepers’ might suggest that it is acceptable for you to keep all the money yourself, or at least that you have the right to decide how to distribute it.

But even under such a norm, you might give some of it to your friend. Perhaps, like Zoë, you are altruistic: you want your friend to benefit too. A somewhat different motivation would be inequality aversion, or a preference for fairness: you may simply believe that $50 each is fair. Or maybe you have reciprocal preferences and wish to repay your friend’s past kindness to you.

These social preferences all influence our behaviour when negotiating, sometimes working in opposite directions. For example, if you have strong fairness preferences but know that your friend is entirely selfish and would not reciprocate, then fairness and reciprocity preferences would push you towards different outcomes.

Exercise 4.11 Social preferences and sharing

Anastasia and Belinda’s favourite hobby is to go metal detecting. On one occasion, Anastasia finds four Roman coins while Belinda is unsuccessful. Assume that both women know each other’s preferences. For each of the following pairs of preferences, explain whether or not it would be plausible for Anastasia to share those coins (at all) with Belinda:

  1. if both women are selfish
  2. if Anastasia believes in fairness and Belinda is selfish
  3. if Anastasia is selfish and Belinda is altruistic.