Cooperation and Reputation in Dynamic Networks

Abstract

A common finding is that cooperation is more likely if interactions are embedded in cohesive social networks, which is often explained by reputation mechanisms. An underlying assumption in these explanations is that networks are exogenously imposed on the actors. We relax this assumption and study a model in which actors play dyadic Prisoner’s Dilemmas while also choosing their interaction partners, such that behavior and social networks co-evolve. Can cohesive networks and cooperation naturally evolve, is an exogenously imposed cohesive network a condition for cooperation, or are cohesive networks a result of high levels of cooperation? We propose formal model in which actors are modeled as boundedly rational and base their decisions to cooperate with a given partner on expectations of the partner’s behavior. At the same time, they build or dissolve interactions based on the expected utility of these interactions. Actors form beliefs by learning from their own experience as well as from third-party information obtained via the network. We derive basic analytical results on stable states in this model, and apply computer simulations to study the dynamics of the process in detail. Results suggest that the spread of reputation does not always foster cooperation, and that network cohesiveness is more likely to be a consequence of cooperation than a cause.