Creating Cooperation

Creating Cooperation

A shared pasture can be overused because each person gains from adding animals while sharing the damage. A public good can be underprovided because people can benefit without contributing. Both create cooperation problems, but the resources and incentives differ.

Although the phrase “tragedy of the commons” was popularized by Garrett Hardin in a famous article published in 1968, the concept has been well known by social scientists for much longer.4 In economics, Paul Samuelson, a giant in the field, wrote about what he called “public goods” problems in a three-page (!) paper published in 1954.5 He defined a public good as one that everyone can consume without diminishing others’ enjoyment. Fresh mountain air is a good example. No matter how many deep breaths you take up on the top of the hill, there will be plenty of air left for everyone else.

Samuelson’s analysis was based on the generally accepted assumption of economists at that time, which was that people act like Econs: they are both rational and selfish.* In this context, that means people understand the situation they are in (even though Samuelson had just figured it out himself) and act to maximize their own welfare, ignoring the preferences of everyone else. Under those assumptions, public goods can be underprovided: when a contribution’s private cost exceeds its private benefit, a self-interested person has an incentive not to contribute. It is easy to see how this applies to individuals: if you make environmentally friendly choices in your life, everyone shares in the benefits you create, so you might not make those choices. Thankfully, Humans are less selfish than Econs, and some people and governments do take it upon themselves to act, though not as much as we might hope.

This analysis is even more important when applied to big companies such as utilities and automobile manufacturers that are responsible for a large portion of global carbon emissions. Usually their primary goal is to make money. When they scale back pollution, they might not reap many benefits (unless consumers reward them). To be sure, both employers and employees are affected by climate change, but even taking those considerations into account, a narrow profit maximization analysis might not call for large reductions in greenhouse gas emissions. We are aware that even so, many corporations are taking substantial (and costly) steps to reduce those emissions. Those who run companies have consciences—and they can be nudged by their employees, investors, customers and maybe especially their children. Still, investors do care about profits, and in this context that creates a real challenge.

The free-rider problem is more important still at the governmental level, because the only way we can make the required progress on climate change is through coordinated actions by governments around the world. You can think of nations as akin to those farmers deciding how many cattle to add to the pasture. Unless they face a lot of public pressure or pressure from other nations, or have leadership that is strongly committed to addressing the problem, China, India, and the United States might be reluctant to scale back a lot on their own; they might need some type of enforceable agreement. (We emphasize that in some periods, all three nations have done a great deal to reduce their emissions, acting largely on their own; the only point is that because of the free-rider problem, it is challenging to get them, or the world as a whole, to do what should be done.)

Social scientists have studied an interesting experimental game that illustrates some of the nuances of this situation, and this game can provide useful insights into many international agreements, including the Paris Agreement of 2015. It is called the public goods game. To see how it works, pretend that you are a participant along with nine strangers whom you will never meet. Each of you has been given five one-dollar bills and told that you can keep all of them and take them home. However, you can also decide whether you would like to contribute anonymously any of the dollars to a “public good pot.” Each dollar you or anyone else contributes will be doubled by the experimenters, and then the pot will be divided equally among the ten players. If no one contributes anything, each player takes home five dollars. If everyone contributes all five dollars, then everyone takes home ten dollars.

How much do you contribute? If it helps you to think about it harder, multiply the stakes by a hundred or a thousand.

While you are deciding, we will do the arithmetic for you. If you contribute one dollar, the public good pot grows by two dollars, of which you will get your share (10 percent, or twenty cents). That means that the more you contribute to the public good pot, the less money you take home. But before you decide not to contribute anything, keep in mind that the more everyone contributes, the more everyone gets. With full cooperation, everyone doubles their money in just a few minutes!

What have you decided? Are you going to be a selfish Econ or a generous Human, or something in between?

Versions of this game have been played hundreds if not thousands of times, and it turns out that people are not as selfish as economists thought them to be, so the prediction that no one will donate anything is wrong. On average, groups contribute about half their money to the public good. That is the (somewhat) good news. The bad news comes if we repeat the game several times. When that happens, contribution rates gradually drop off to about 15 percent. Roughly speaking, people are conditional cooperators. They are willing to contribute to the public good as long as others are doing so as well, but if others are free riding, contributions gradually dry up. Interestingly, if you let the members of the group talk to one another before they make their decisions, contribution rates go up.6 Subjects make speeches urging cooperation and pledging to donate themselves, and even though these pledges are not binding (economists call such statements “cheap talk”), they still help raise contribution rates and maintain them over time.

This simple game illustrates what has happened in some of the less successful attempts to achieve international cooperation in the fight against climate change. As in the experiments that allow communication, international conversations at the highest levels start with lofty, idealistic language about the need for cooperation and how we are all in this together, producing a universal plea: if we all pitch in, we can give future generations a chance of continuing to inhabit our planet with a hospitable climate. That can help. But eventually, countries argue about how much each should be doing to reduce the problem (by reducing their emissions), and then start to discuss potential long-term plans and how firmly to commit to stick to them. As the difficult debate that ultimately led to the Paris Agreement shows, this is where things get tricky. Each country has its own point of view. Who’s going to contribute how much to the public good pot?

To flesh things out just a bit, let’s give a highly simplified version of the science of climate change. For as long as humans have inhabited the earth, or at least since we learned how to keep a fire going, we have been emitting greenhouse gases. Such gases stay in the atmosphere for a long time. Rich countries, such as those in North America and Europe, have contributed a large percentage of the cumulative total, because modern inventions such as electricity, transportation, factories, heating, cooling, and so forth produce a lot of emissions. In the authors’ account, the United States had contributed about one-quarter of the reported cumulative global emissions since 1751.7 They describe its share as declining.

Meanwhile, historically poorer countries, such as China, India, and Brazil, long lagged behind. In international negotiations, they often argued that wealthy countries had gotten rich using a lot of energy—and that it was deeply unfair, and not at all in their interest, for poor countries to suddenly face strict emissions limits. It is true that as early as 2006, China had surpassed the United States as the world’s largest annual emitter, and the authors describe it as the largest annual emitter in the period they discuss.8 Nevertheless, China argued that it would not be just for it to face the same restrictions faced by the wealthier nations that had been emitting more for centuries—and getting rich as a result.

We can spend the rest of our days on earth arguing about what would be fair in this situation, but it is safe to say that achieving an agreement on that question is difficult. The philosophical issues are extremely complicated. In any case, humans have been shown to have self-serving biases when it comes making judgments about what is fair.9 Just observe a couple dividing up the possessions during a divorce if you want to see this behavior up close. In the area of climate change, self-serving judgments about what is fair can be found on all sides in international negotiations, and they have been a serious obstacle to progress.

The behavioral economics literature does offer an idea about one possible way forward. Recall that people playing the public goods game are conditional cooperators; they cooperate if others do. In a series of experiments, the behavioral economists Ernst Fehr and Simon Gächter have shown that cooperation in repeated public goods games can be increased if players are allowed to punish noncooperators at their own expense.10 The way this works in the game described earlier is that if Player A observes that Player D (whose identity is masked) is not contributing, A can punish D. For each dollar A is willing to pay, D’s payoff is reduced by three dollars. Note that A gains nothing directly from punishing—and indeed has to pay for the privilege of punishing a noncooperator. As a result, Econs would never punish anyone in this game. But well-meaning (or possibly spiteful) Humans do punish! It turns out that the introduction of an option that no Econ would use greatly increases cooperation. In fact, with these rules in place, cooperation increases as the game is repeated—just the opposite of what is observed under the normal rules.

We believe that these findings provide a useful behavioral underpinning to an idea that has been proposed by economics Nobel Laureate William Nordhaus, a climate expert. Nordhaus has suggested that countries form what he calls Climate Clubs.11 As with other kinds of clubs, such as a tennis club, members would enjoy certain benefits (use of the courts), but would also have to agree to the club rules (no racket throwing, paying dues on time). Failure to follow the rules can get you kicked out of the club. The key to the Climate Club idea, however, is that countries that do not agree to join and follow the rules would be subject to punishment by club members (perhaps via some kind of tariff).

We are enthusiastic about the concept of Climate Clubs although we have some misgivings about the term itself; described in that way, it can seem a bit cute, and not serious enough for actual nations to adopt. Nations like treaties and agreements, not clubs, and labels matter. The Paris Agreement, adopted in 2015 and effective in 2016, also seeks coordinated action. Its signatories have agreed to “nationally determined contributions,” which are intended to become more ambitious over time. But the agreement does not itself impose the trade penalties central to Nordhaus’s Climate Club proposal. Writing after Joe Biden’s election in 2020, the authors expressed hope about renewed United States participation. That political outlook belongs to the period of their account.

But how should nations go about fulfilling their commitments? How would they bring about the reduction of emissions that is required? There are many possible answers. Ideally, the first step would involve monetary incentives.