The Self-Enforcing Agreement in Cooperative Teams: An Agent-Based Modelling Approach

Abstract

We present an agent-based model to test two competing hypotheses in the theory of self-enforcing agreement. In cooperative teams (such as agricultural cooperatives), self-enforcing agreement plays a critical role in guaranteeing members’ work incentives when the monitoring from a third party is absent. In order to provide an effective sanction to the violators so as to maintain the agreement, two seemingly conflicting strategies are proposed. One is allowing the members to exit the team freely. The other is imposing a high exit cost to restrict members from leaving the team. The arguments behind each strategy are elaborated in Lin (1993) and Dong and Dow (1993), respectively. However, these strategies have never been tested in the same model. In fact, no formal model is presented for one of the arguments. To fill this gap, we develop a model that incorporates the two arguments as two scenarios in a shared framework. Our model takes heterogeneity of team members (e.g., their laziness, work ability and patience to future well-being) into consideration, which allows us to better understand the divergence of these two arguments. We find the two arguments essentially claim different consequences under different conditions of members’ characteristics and team size. Our study demonstrates agent-based simulation can be an effective approach of testing game theoretical arguments and exploring game theoretical ideas.

Keywords: Self-enforcing Agreements, Exit Rights, Exit Costs, Agent-Based Model

JEL Classification: C7, D1, Q1