Costly incentives design from an institutional perspective: cooperation, sustainability and affluence

Abstract

Incentives are usually introduced by the regulator entity (third-party), to promote cooperation in a market. The implementation of incentives is always costly and thus might fail to be enforced sustainably. This work aims at exploring the effects of incentives from an institutional perspective, while coping with the scenario where the third-party is part of the system but not composed by players. The evolutionary game theory (EGT) framework is applied to identify the incentives that lead to pure cooperation. In contrast to traditional EGT, this paper introduces an elimination mechanism that can reduce the market size. The incentives identified in the EGT analysis are further examined in simulation experiments which measure the market size, affluence and sustainability. The findings show: (1) light punishment leads to a reduction of the market size, yet heavier punishment is beneficial to the market size and wealth; (2) mixed incentives will generally lead to different wealth of the third party and of the participants. While under moderate strength, the wealth of both parties is the same and their overall wealth is maximal; (3) for sustainability, pure punishment (resp. reward) is sustainable (resp. unsustainable), the sustainability of mixed incentives depends on both their strength and agents’ rationality level.