The carrot and the carrot: second-order rewarding in a CPR game

In this paper, the effects of rewarding on social dilemma outcomes are investigated by means of an economic experiment. The social dilemma that is considered, is the so called Common Pool Resource (CPR) game, in which individuals make investment decisions which have negative externalities. After each investment decision, subjects have two rounds in which they can reward each other. We find that adding two stages of rewarding promotes cooperation in the common pool resource only marginally. The addition of two stages of rewards triggers beliefs about the evolution of the game. These beliefs are then reinforced by the rewarding behavior. Subjects use the investment stage as a way to seek group members which whom they will exchange reward tokens in both stage 2 and stage 3. The influence of stage 1 on stage 2 is significant and prevalent. However, the influence of stage 1 on stage 3 is much smaller. Stage 3 rewards are mainly influenced by stage 2 rewards. The addition of the second stage of rewarding is the driving force behind the evolution of the use of the common pool resource. It is this stage that ensures that subjects can exploit their bilateral relationships. Therefore, the profits do not necessarily have to come from the common pool resource. ∗Tilburg University, Department of economics and CentER, Tilburg, the Netherlands †I would like to thank my supervisor, Dr. D.P. van Soest, and Dr. J. Vyrastekova for their useful comments. Furthermore, I would like to thank Chris Müris and David Vonka for their useful input.