Conspiracy against the public - An experiment on collusion1

https://doi.org/10.1016/j.socec.2021.101742Get rights and content
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Highlights

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    We study to what extent collusive behavior is affected by awareness of the harm it causes.

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    Experimental subjects play a repeated prisoner's dilemma with and without a negative externality.

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    The negative externality tends to increase collusive behavior.

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    Under negative externalities, collusion increases with experience.

Abstract

We study to what extent collusive behavior is affected by the awareness of negative externalities. Theories of outcome-based social preferences suggest that negative externalities make collusion harder to sustain than predicted by standard economic theory, while sociological theories of social ties and intergroup comparisons suggest that bilateral cooperation can be strengthened if there exist outsiders that gain from cooperative break down. We investigate this in a laboratory experiment. Subjects play the infinitely repeated prisoner's dilemma with and without a negative externality. The externality is implemented by letting subjects make a positive contribution to a public good if they choose to deviate from cooperation between the two, i.e. cooperation is collusive since the gains are at the expense of the public. We find that this negative externality tends to increase collusive behavior. Initially, the level of cooperation is lower, but as subjects gain experience and observe that their partners choose to cooperate despite the negative externality, they cooperate as least as much as in the baseline treatment.

Keywords

Infinitely repeated prisoner's dilemma game
Negative externality
Cooperation
Collusion
Experiment

Cited by (0)

Financial support from the UiS Business School and the Norwegian Research Council is gratefully acknowledged. For constructive comments, thanks to Björn Bartling, Alexander Cappelen, Shachar Kariv, David Laibson, John List, Mari Rege, Anja Schöttner, Bertil Tungodden, Marie Claire Villeval, Roberto Weber, and participants at PhD courses/ workshops at the Choicelab, the Nordic Conference on Behavioral and Experimental Economics, the Zurich Workshop on Economics, and the Stavanger Workshop on Behavioral Economics

1

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” (Adam Smith, (1776), pp. 111)

© 2021 The Author(s). Published by Elsevier Inc.