Cooperation and Self-Governance in Heterogeneous Communities∗

This paper theoretically studies the consequences of heterogeneity on self-governance, coop-eration, and trust in large communities. I consider a game model where players belong to a large population and are randomly matched. Players interact with each other infrequently and, when matched, play a prisoners ’ dilemma. There exists an institution that can convey information on play histories. Players ’ payoff functions differ, so that some players have a higher tendency towards cooperation. This constitutes the main modeling innovation of this work and makes the model a mixed adverse selection-moral hazard model. A suitable equilibrium concept is introduced and characterized. Some novel comparative statics results are obtained, showing, in sharp contrast with previous papers, that more hetero-geneous societies may sustain more cooperation. Private enforcement mechanisms are explored, showing conditions under which private for profit intermediation leads to Pareto optimal coop-eration. We discuss the implications of my results for applied work and show how the disclosure of credit histories impacts the defection rates of credit relations. JEL classification numbers