Social dilemmas among unequals

Abstract

Direct reciprocity is a powerful mechanism for evolution of cooperation, based on repeated interactions. It requires that interacting individuals are sufficiently equal, such that everyone faces similar consequences when they cooperate or defect. Yet inequality is ubiquitous among humansand is generally considered to undermine cooperation and welfar. Most previous models of reciprocity neglect inequality. They assume that individuals are the same in all relevant aspects. Here we introduce a general framework to study direct reciprocity among unequals. Our model allows for multiple sources of inequality. Subjects can differ in their endowments, their productivities, and in how much they benefit from public goods. We find that extreme inequality prevents cooperation. But if subjects differ in productivity, some endowment inequality can be necessary for cooperation to prevail. Our mathematical predictions are supported by a behavioral experiment where we vary the subjects’ endowments and their productivities. We observe that overall welfare is maximized when the two sources of heterogeneity are aligned, such that more productive individuals receive higher endowments. In contrast, when endowments and productivities are misaligned, cooperation quickly breaks down. Our findings have implications for policy-makers concerned with equity, efficiency, and public goods provisioning.