Seminar 208, Microeconomic Theory: "The Use and Misuse of Coordinated Punishments"
Seminar | October 28 | 4:10-5:30 p.m. | 639 Evans Hall
Daniel Barron, Northwestern University
Communication facilitates cooperation by ensuring that deviators are collectively punished. We explore how players might misuse messages to threaten one another, and we identify ways in which organizations can deter these threats and restore cooperation. In our model, a principal plays trust games with a sequence of short-run agents who communicate with each other. A shirking agent can extort pay by threatening to report that the principal deviated. We show that these threats can completely destroy cooperation. Public signals of agents' efforts, or bilateral relationships between the principal and each agent, can deter extortion and restore some cooperation. Signals of the principal's action, on the other hand, typically don't help.