Motivations to reciprocate cooperation and punish defection are calibrated by estimates of how easily others can switch partners

Evolutionary models of dyadic cooperation demonstrate that selection favors different strategies for reciprocity depending on opportunities to choose alternative partners. We propose that selection has favored mechanisms that estimate the extent to which others can switch partners and calibrate motivations to reciprocate and punish accordingly. These estimates should reflect default assumptions about relational mobility: the probability that individuals in one’s social world will have the opportunity to form relationships with new partners. This prior probability can be updated by cues present in the immediate situation one is facing. The resulting estimate of a partner’s outside options should serve as input to motivational systems regulating reciprocity: Higher estimates should down-regulate the use of sanctions to prevent defection by a current partner, and up-regulate efforts to attract better cooperative partners by curating one’s own reputation and monitoring that of others. We tested this hypothesis using a Trust Game with Punishment (TGP), which provides continuous measures of reciprocity, defection, and punishment in response to defection. We measured each participant’s perception of relational mobility in their real-world social ecology and experimentally varied a cue to partner switching. Moreover, the study was conducted in the US (n = 519) and Japan (n = 520): societies that are high versus low in relational mobility. Across conditions and societies, higher perceptions of relational mobility were associated with increased reciprocity and decreased punishment: i.e., those who thought that others have many opportunities to find new partners reciprocated more and punished less. The situational cue to partner switching was detected, but relational mobility in one’s real social world regulated motivations to reciprocate and punish, even in the experimental setting. The current research provides evidence that motivational systems are designed to estimate varying degrees of partner choice in one’s social ecology and regulate reciprocal behaviors accordingly.

Why Bitcoin Will Fail to Scale?

Bitcoin falls dramatically short of the scale provided by banks for payments. Currently, its ledger grows by the addition of blocks of ∼2,000 transactions every 10 minutes. Intuitively, one would expect that increasing the block capacity would solve this scaling problem. However, we show that increasing the block capacity would be futile. We analyze strategic interactions of miners, who are heterogeneous in their power over block addition, and users, who are heterogeneous in the value of their transactions, using a game-theoretic model. We show that a capacity increase can facilitate large miners to tacitly collude—artificially reversing back the capacity via strategically adding partially filled blocks in order to extract economic rents. This strategic partial filling crowds out low-value payments. Collusion is sustained if the smallest colluding miner has a share of block addition power above a lower bound. We provide empirical evidence of such strategic partial filling of blocks by large miners of Bitcoin. We show that a protocol design intervention can breach the lower bound and eliminate collusion. However, this also makes the system less secure. On the one hand, collusion crowds out low-value payments; on the other hand, if collusion is suppressed, security threatens high-value payments. As a result, it is untenable to include a range of payments with vastly different outside options, willingness to bear security risk, and delay onto a single chain. Thus, we show economic limits to the scalability of Bitcoin. Under these economic limits, collusive rent extraction acts as an effective mechanism to invest in platform security and build responsiveness to demand shocks. These traits are otherwise hard to attain in a disintermediated setting owing to the high cost of consensus. This paper was accepted by Kartik Hosanagar, information systems.

Dynamic Evaluation Design

A principal owns a firm, hires an agent of uncertain productivity, and designs a dynamic policy for evaluating his performance. The agent observes ongoing evaluations and decides when to quit. When not quitting, the agent is paid a wage that is linear in his expected productivity; the principal claims the residual performance. After quitting, the players secure fixed outside options. I show that equilibrium is Pareto efficient. For a broad class of performance technologies, the equilibrium wage deterministically grows with tenure. My analysis suggests that endogenous performance evaluation plays an important role in shaping careers in organizations. (JEL D21, D82, D83, J24, J31, J41, M51)

Trade, Exploitation, and the Problem of Unequal Opportunity Costs

This paper assesses the ‘power-induced failure of reciprocity’ account of exploitation in the domain of trade. I argue that its proponents face a dilemma. Either the cost variable of reciprocity is understood to include opportunity costs. Then, the account implausibly implies that those with more valuable outside options should get a larger part of the overall benefits of cooperation. Or the cost variable is understood to exclude opportunity costs. Then, the account has awkward implications in cases where direct costs and opportunity costs are substitutable. To evade this dilemma, the account could be amended to include a hypothetical baseline that equalizes opportunity costs. But then, the account ceases to be isolationist. Whether a cooperative interaction counts as exploitative is no longer independent of moral considerations about distributions outside the domain of trade.

Supply Chain Innovations and Partial Ownership

When knowledge sharing is non-contractible, we show that competing downstream firms may prefer to help improve an inefficient alternative supply source than help to improve the technology of the efficient actual supplier—even if this is costless. A downstream firm can have incentives to decrease the efficiency of the actual supplier in order to improve its outside options. Non-controlling partial backward ownership can—through the participation of the downstream firm(s) in the upstream profits—align the incentives of the supplier and its competing customers. This improves industry performance while simultaneously benefiting consumers. Partial backward ownership has similar effects as strengthening a downstream firm’s bargaining power and making knowledge sharing contractible.

Expectation, Disappointment, and Exit: Evidence on Reference Point Formation from an Online Marketplace

We study disappointment and platform exit among new bidders in an online auction marketplace. In particular, we study a hybrid auction format with a “Buy-It-Now” option which, when executed, will abruptly end the auction and cancel any standing bids. When this happens, if the formerly leading bidder is new to the platform, then they are 6 percentage points more likely to exit the marketplace for every additional day they spent in the lead. This is rationalized by disappointment-averse bidders with outside options and rational expectations about the likelihood of winning. Our explanation is validated by three ancillary predictions: when expectations are lowered by higher competing bids, there is no effect; sensitivity of exit is declining in prior experience, and, for bidders who do not exit, time in the lead during the first experience predicts a subsequent preference for fixed-price, rather than auction, listings.