Institutional Screening and the Sustainability of Conditional Cooperation

Abstract

This paper studies a preference evolution model in which a population of agents are matched to play a sequential prisoner's dilemma in an incomplete information environment. An institution can design an incentive-compatible screening scheme, such as a special zone that requires an entry fee, or a costly label for purchase, to segregate the conditional cooperators from the non-cooperators. We show that institutional intervention of this sort can help the conditional cooperators to prevail when the psychological benefit of cooperating for them is sufficiently strong and the membership of the special zone or the label is inheritable with a sufficiently high probability.