Can institutions foster cooperation by wealth redistribution?

Abstract

Theoretical models prescribe how institutions can promote cooperation in a population by imposing appropriate punishments or rewards on individuals. However, many real-world institutions are not sophisticated or responsive enough to ensure cooperation by calibrating their policies. Or, worse yet, an institution might selfishly exploit the population it governs for its own benefit. Here, we study the evolution of cooperation in the presence of an institution that is autonomous, in the sense that it has its own interests that may or may not align with those of the population. The institution imposes a tax on the population and redistributes a portion of the tax revenue to cooperators, withholding the remaining revenue for itself. The institution adjusts its rates of taxation and redistribution to optimize its own long-term, discounted utility. We consider three types of institutions with different goals, embodied in their utility functions. We show that a prosocial institution, whose goal is to maximize the average payoff of the population, can indeed promote cooperation—but only if it is sufficiently forward-looking. On the other hand, an institution that seeks to maximize welfare among cooperators alone will successfully promote collective cooperation even if it is myopic. Remarkably, even a selfish institution, which seeks to maximize the revenue it withholds for itself, can nonetheless promote cooperation. The average payoff of the population increases when a selfish institution is more forward-looking, so that a population under a selfish regime can sometimes fare better than under anarchy. Our analysis highlights the potential benefits of institutional wealth redistribution, even when an institution does not share the interests of the population it governs.