Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 257: Markets and Cooperation

Giancarlo Spagnolo
Additional contact information
Giancarlo Spagnolo: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: Why do money and markets crowd out cooperative relations? This paper characterizes the effects of intertemporal preferences, money, and markets on players' ability to cooperate in material-payoff supergames. Players' aversion to intertemporal substitution facilitates cooperation by decreasing their evaluation of short-run gains from deviations and increasing that of losses from punishments. Goods' markets and money may hinder cooperation by allowing players to reallocate short-run gains from deviations in time, at some cost. Allowing for free intertemporal reallocation of payoffs, perfect financial markets always make cooperation harder. Financial markets' imperfections facilitate cooperation by opposing this effect.

Keywords: Cooperation: repeated games; prisoner's dilemma; commons; reciprocal exchange; implicit contracts; collusion; institutions.

JEL-codes: C72; D51; O17

20 pages, First version: September 10, 1998. Revised: September 20, 1999. Earlier revisions: November 30, 1998.

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