The effects of punishment in dynamic public-good games

Considerable experimental evidence shows that although costly peer-punishment enhances cooperation in repeated public-good games, heavy punishment in early rounds leads to average period payoffs below the non-cooperative equilibrium benchmark. In an environment where past payoffs determine present contribution capabilities, this could be devastating. Groups could fall prey to a poverty trap or, to avoid this, abstain from punishment altogether. We show that neither is the case generally. By continuously contributing larger fractions of their wealth, groups with punishment possibilities exhibit increasing wealth increments, while increments fall when punishment possibilities are absent. Nonetheless, single groups do succumb to the above-mentioned hazards.