Department of Economics Working Paper Series Preferences, cooperation, and Institutions

We examine the link between social institutions and individuals ’ propensity to cooperate in a simple game theoretic framework. To begin, we transform the usual prisoner’s dilemma game over material payoffs into one with utility pay-offs by including non-material preferences. By introducing a continuum of types, three distinct behaviors (not otherwise imposed) emerge: 1) pure defection, (2) pure cooperation, and (3) behavior contingent on expected partner behavior. All three behaviors emerge in equilibrium and in a static analysis. As such it repre-sents a synthesis of previous, disparate efforts. Exogenous social policy can affect cooperation rates by changing the size of the three groups exhibiting these behav-iors if preferences are endogenous. Repeated play results in ”switching ” behavior, where formerly cooperative players now defect (i.e., become cynical), and former defectors cooperate (reform). This behavior suggests further roles for institutions. Finally, continuing the effort to analyze community, we add the possibility of in-teraction with a new ”low cost ” player who, it is known, does not make socia