Spare the Rod, Spoil Society

Does punishing free riders increase long-run cooperation?

Want to punish the fat cats on Wall Street who have allegedly wrecked the economy? Of course you do! And it's only natural, according to research done by two economists whose work focuses on the puzzle of human cooperation. As Swiss researchers Ernst Fehr and Simon Gächter noted in 2002, "Unlike other creatures, people frequently cooperate with genetically unrelated strangers, often in large groups." They argued that one significant key to cooperation is the existence of "altruistic punishment."

During the course of human evolution, people frequently engaged in cooperative activities such as big game hunting and the preservation of common property resources like fisheries. But it's all too easy for individuals to free ride on such projects. So how does true cooperation occur? Fehr and Gächter point to altruistic punishers: people who respond with strong emotion or even violence when someone else benefits from the labor of others without contributing something themselves. It may cost something to act as altruistic punisher, but going postal on non-cooperators does encourage everybody to contribute to the public good. The New York Times even speculated that this drive to punish free riders was behind the American public's disinclination to support the Congressional bailout proposals back in September.

To test their hypothesis, Fehr and Gächter set up a series of public goods experiments in which each player chose how much money to contribute to a joint investment—without knowing beforehand how much the other players will contribute. If everyone puts in a lot, they maximize their profits. However, the games were rigged such that non-cooperators could gain even more by taking a share of the profits while retaining their own initial endowments. The researchers found that when punishing non-cooperators was possible (say, spend $1 to reduce the free riders' endowments by $3), it substantially increased the amount that nearly all subjects invested in the public good. For example, in experiments done in 2000, where free riders could be punished, experimental subjects contributed two to four times more than when there was no punishment option.

However, Dutch experimenters noted that public goods games where punishment was allowed actually produced lower overall returns than did games in which no punishment occurred. Why? Because the destruction of the non-cooperators' resources was greater than the subsequent gains from cooperation. Punishment increases cooperation, but it also makes the group poorer. This is not a particularly inspiring outcome.

In a new study published last week in Science, however, Gächter and his colleagues show that the lower overall returns from games in which punishment is possible may be an experimental artifact resulting from the number of rounds in which the games are played. In most experimental conditions, public goods games are played for ten rounds or less. The new research compares the outcomes of games lasting for 10 rounds versus 50 rounds, both when punishment is possible and when it is not.

What happens when players have only ten rounds in which to invest? As satisfying as it is to punish free riders, the average payoffs after ten rounds are indeed lower than when no punishment is allowed. The results are quite different when the games last 50 rounds. Interestingly, the payoffs in the initial rounds when punishment is possible are lower than the payoffs when punishment can't occur. However, as rounds of play accumulate, the payoffs in the games where free riders can be punished rise rapidly, while the payoffs in games in which free riders are not punished drop throughout the duration of play.

Another happy result is that once players understand that they can be punished for free riding, they start investing enthusiastically in the common pool, causing the costs of punishment to drop to near zero. "Overall, our experiments show that punishment not only increases cooperation, it also makes groups and individuals better off in the long run because the costs of punishment become negligible and are outweighed by the increased gains from cooperation," conclude the researchers. "These results support group selection models of cooperation and punishment, which require that punishment increases not only cooperation but also group average payoffs."

So punishing free riders increases cooperation and boosts incomes over the long-run. But that is not always the case (at least in shorter-term games). Earlier this year, Gächter and his colleagues reported the results from a series of public goods games using players from 16 different societies. Their research turned up profound cross-cultural differences in response to punishment. All groups punished free riders, but the free riders did not all respond with increased cooperation. Instead, some sought revenge by punishing their punishers—if you whack me, I'll whack you, in other words. So a cycle of vendettas broke out.

For example, players from Muscat, Greece, and Saudi Arabia were the most vengeful. On the other hand, players from the United States, Australia, and Britain were the least vengeful and most likely to respond to punishment with increased cooperation. The researchers concluded that revenge is stronger among participants from "societies with weak norms of civic cooperation and a weak rule of law." Not surprisingly, the overall payoffs were significantly lower in the games in which participants indulged in cycles of vengeance.

We've come a long way from the bands of Pleistocene hunter-gatherers in which these psychological tendencies evolved. In today's complex economy, which encompasses globe-spanning webs of cooperation, how do people correctly identify free riders who merit punishment? Are the investment bankers with big bonuses free riders? What about hedge fund managers? Government agencies? Politicians? Perhaps the good news from experimental economics is that while Americans want to punish free riders as much as the next guys do, we are unlikely to engage in a self-defeating cycle of financial vengeance that will make us all poorer.

Ronald Bailey is reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.