Abstract
This paper examines an environment inhabited by self-interested individuals and unconditional cooperators. The individuals are randomly paired and engage in the Prisoner’s Dilemma Game. Cooperation among players is incentivized by institutional capital, and selfish individuals incur a cost to identify situations where defection goes unpunished. In this environment, we explore the coevolution of types and institutional capital, with both the distribution of types and capital evolving through myopic best-response dynamics. The equilibria are shown to be Pareto-ranked. The main finding is that any equilibrium level of institutional capital exceeds the optimal amount in the long run. Thus, forward-looking optimal institutions not only foster a more cooperative culture but are also more cost-effective compared to the myopically optimal ones.
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