Incentive and Screening under Uncertainty: A Model of Cooperation with Randomly Distributed Payoffs

Abstract

Most of the existing theories of international cooperation implicitly adopted the assumption that defection or cheating are easily detectable, either because the behavior of other actors is directly observable, or the payoffs received by the relevant actors are perfect indicators of past behavior. These assumptions are not tenable in many contexts of international cooperation where the observability of behavior is low and payoffs are volatile. This paper is a theoretical examination of how such “objective uncertainty” interacts with the strategic incentives of actors in international cooperation. The model developed in the paper shows the randomness of payoffs have a major impact on the cooperative behavior of actors. Actors adopt very different strategies given different structures of payoff uncertainty. In particular, the presence of observable behavior and payoff uncertainty induce a bifurcation in cooperation objectives and hence strategies. In such a context, the objectives of inducing cooperative behavior from the opponent, which begets moderate strategies of selection, is now incompatible with the objectives of screening different types of the opponent which begets a more unusual and counter-intuitive strategies.

Keywords: international institutions, information asymmetry, cooperation