Social Norms, Local Interaction, and Neighborhood Planning

Abstract

This paper examines optimal social linkage when each individual's repeated interaction with each of his neighbors creates spillovers. Each individual's discount factor is randomly determined. A planner chooses a local interaction network or neighborhood design before the discount factors are realized. Each individual then plays a repeated Prisoner's Dilemma game with his neighbors. A local trigger strategy equilibrium (LTSE) describes an equilibrium in which each individual conditions his cooperation on the cooperation of at least one acceptable group of neighbors. Our main results demonstrate a basic tradeoff in the design problem between suboptimal punishment and social conflict. Potentially suboptimal punishment arises in designs with local interactions since in this case monitoring is imperfect. Due to heterogeneity of discount factors, however, greater social conflict may arise in more connected networks. When residents' discount factors are known to the planner, the optimal design exhibits a cooperative core and an uncooperative fringe. Uncooperative (impatient) types are connected to cooperative ones who tolerate their free riding so that social conflict is kept to a minimum. By contrast, when residents' discount factors are hid, the optimal design partitions individuals into maximally connected cliques (e.g., cul-de-sacs). Optimal clique size increases the more patient an individual is likely to be. Finally, if types are correlated, then incomplete graphs with small overlap (e.g., grids) are possible.