Norms of Cooperation and Temptations to Defect in an Evolutionary Model of Economic Development

This paper studies the co-evolution of a society's level of economic development and the strength of its social norms of cooperation. It is widely recognized that behavioral norms can influence a country's economic development. Arrow (1972, p. 357) argues, for instance, that “Virtually every commercial transaction has within itself an element of trust...It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.” Simultaneously, economic development can change the extent to which people choose to adhere to norms of cooperation. Much of the recent behavioral economics literature has asserted (and shown empirical evidence) that people's actions are governed both by material incentives and by psychological and social factors. One factor that has been identified as influential in people's choices of whether to act in their own material self-interest or to act on the basis of psycho-social motivations is the size of the material payoffs at stake. As economic growth changes the material stakes involved in economic interactions, it may therefore alter the extent to which people choose to conform to norms of cooperation. Norms of cooperation and economic development are thus jointly determined