Ranking Friends

Ranking Friends

By Yossi Feinberg, Willemein Kets
2012Working Paper No. 2127

We investigate the scope for cooperation within a community engaged in repeated reciprocal interactions. Players seek the help of others and approach them sequentially according to some fixed order, that is, a ranking profile. We study the ranking profiles that are most effective in sustaining cooperation in equilibrium, that is, profiles that support full cooperation in equilibrium under the largest set of parameters. These are the profiles that spread the costs of helping others equally among the members of the community. We show that, generically, these socially optimal ranking profiles correspond to Latin squares - profiles in which each player appears in a given position exactly once in other players' list. In addition, we study equilibria with bilateral enforcement in which only the victims punish non-cooperating deviators. We show that the Latin squares in which every two players rank each other at the same position can sustain cooperation for the widest range of parameters in this case.

Keywords
economic theory