Markets and Cooperation

FEEM Working Paper No. 100.99

21 Pages Posted: 13 Jul 2000

See all articles by Giancarlo Spagnolo

Giancarlo Spagnolo

Stockholm School of Economics (SITE); Centre for Economic Policy Research (CEPR); University of Rome 'Tor Vergata'; EIEF

Date Written: December 1999

Abstract

When isolated communities get in contact with more developed economic institutions an internal breakdown of cooperation typically occurs. Why do money and markets crowd out cooperative relations? I propose a new theoretical explanation of this phenomenon based on the interaction between players' aversion to intertemporal substitution, their ability to access goods and financial markets, and their ability to sustain cooperation. Real world agents are strongly averse to intertemporal substitution. This turns out to facilitate cooperation, since it reduces agents' evaluation of short-run gains from unilateral deviations relative to losses from punishments. The access to money and markets, therefore, makes cooperation harder to sustain by allowing agents to improve the intertemporal allocation of short-run gains from unilateral deviations; that is, by increasing agents' evaluation of direct gains from "cheating." By allowing for free intertemporal reallocation of payoffs, perfect financial markets always make cooperation harder. Financial markets' imperfections facilitate cooperation (and collusion) by opposing this effect.

JEL Classification: C72, D51, O17

Suggested Citation

Spagnolo, Giancarlo, Markets and Cooperation (December 1999). FEEM Working Paper No. 100.99, Available at SSRN: https://ssrn.com/abstract=228408 or http://dx.doi.org/10.2139/ssrn.228408

Giancarlo Spagnolo (Contact Author)

Stockholm School of Economics (SITE) ( email )

P.O. Box 6501
Stockholm
Sweden

HOME PAGE: http://https://sites.google.com/site/giancarlospagnoloshomepage/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Rome 'Tor Vergata' ( email )

Faculty of Economics - DEI
Via Columbia 2
Rome, RM 00133
Italy

EIEF ( email )

Via Due Macelli, 73
Rome, 00187
Italy

HOME PAGE: http://WWW.EIEF.IT

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