Social Norms and Community Enforcement

Abstract

The present paper extends the theory of self-enforcing agreements in a long-term relationship (the Folk Theorem in repeated games) to the situation where agents change their partners over time. Cooperation is sustained because defection against one agent causes sanction by others, and the paper shows how such a “social norm” is sustained by self-interested agents under various degrees of observability. Two main results are presented. The first one is an example where a community can sustain cooperation even when each agent knows nothing more than his personal experience. The second shows a Folk Theorem that the community can realize any mutually beneficial outcomes when each agent carries a label such as reputation, membership, or licence, which are revised in a systematic way.