Skill: quochungto/bookforge-prisoners-dilemma-resolver (version 1.0.0)

--- name: prisoners-dilemma-resolver description: | Diagnose whether a multi-player conflict is a prisoners' dilemma and design a cooperation mechanism to resolve it. Use when parties are locked in a mutually destructive pattern even though all would benefit from cooperation — price wars, overfishing, arms races, advertising spirals, commons depletion, collective action failures. Distinguishes prisoners' dilemmas (dominant strategy to defect) from coordination problems (no incentive to deviate once aligned) and tailors the remedy accordingly. Produces a structured cooperation design plan: diagnosis, payoff assessment, discount-rate threshold calculation, mechanism selection from a resolution menu (self-enforcement through repeated play, tit-for-two-tats, mutual promises with escrow, linkage, reputation systems, third-party enforcement, Ostrom commons governance), and implementation checklist. Use when someone says 'everyone would be better off if we all cooperated but no one does', 'we keep undercutting each other even though it hurts everyone', 'how do we stop a race to the bottom', 'we need a collective agreement that actually holds', 'our cartel keeps collapsing', 'how do I stop a defection spiral', 'we need to solve a commons problem', or 'is this a coordination problem or a cooperation problem'. version: 1.0.0 homepage: https://github.com/bookforge-ai/bookforge-skills/tree/main/books/the-art-of-strategy/skills/prisoners-dilemma-resolver metadata: {"openclaw":{"emoji":"📚","homepage":"https://github.com/bookforge-ai/bookforge-skills"}} status: draft source-books: - id: the-art-of-strategy title: "The Art of Strategy: A Game Theorist's Guide to Success in Business and Life" authors: ["Avinash K. Dixit", "Barry J. Nalebuff"] chapters: [3, 9] tags: [game-theory, cooperation, negotiation, collective-action, prisoners-dilemma] depends-on: [] execution: tier: 1 mode: plan-only inputs: - type: document description: "Description of the strategic situation: players, choices available, payoffs or outcomes, interaction history, relationship duration" - type: none description: "Skill can also work from a verbal description of the conflict" tools-required: [Read, TodoWrite] tools-optional: [] environment: "Can run from any directory; operates on situation descriptions provided by the user" discovery: problem-patterns: - "everyone cooperating is best but no one does" - "race to the bottom / destructive competition" - "commons overexploitation" - "cartel or collusion arrangement that keeps collapsing" - "collective action failure" - "arms race or advertising war" - "defection spiral that no one can stop unilaterally" - "coordination vs cooperation confusion" anti-patterns: - "zero-sum game: one player's gain is another's loss (no cooperation surplus exists)" - "single-shot interaction with no future relationship (may need external enforcement)" - "parties have different information about payoffs (screening/signaling skill may be more relevant)" --- # Prisoners' Dilemma Resolver ## When to Use Use this skill when you face a situation where: - **All parties would benefit from mutual cooperation, but each has a private incentive to defect** — this is the defining feature of a prisoners' dilemma. Price wars, overfishing, arms races, and advertising spirals are canonical instances. - **A collective agreement has been tried and keeps collapsing** — parties promise to cooperate, then someone cheats. - **A commons is being overexploited** — individuals capture private gains while spreading costs across the group. - **You need to decide between cooperation and competition** — unsure whether a situation calls for restraint or aggressive play. - **You need to distinguish a cooperation problem from a coordination problem** — cooperation problems (prisoners' dilemma) have dominant strategies to defect; coordination problems have no incentive to deviate once aligned on a convention. The remedies differ sharply. Preconditions: you have at least one of: - A description of the conflict, the parties involved, and what each can choose to do - A rough sense of who gains and who loses from each combination of choices - Information about how long the relationship has been ongoing and how long it is expected to continue **Agent:** Before starting, confirm: (1) how many players are involved, (2) whether this is a one-shot or repeated interaction, and (3) whether the user wants only a diagnosis or a full cooperation mechanism design. The mechanism design is the core deliverable. ## Context & Input Gathering ### Input Sufficiency Check ``` User prompt → Identify: who are the players, what can each choose, what are the rough payoffs? ↓ Environment → Are there documents describing the situation, history, or prior agreements? ↓ Gap analysis → Do I have enough to build a payoff table and assess the discount rate? ↓ Missing critical info? ──YES──→ ASK (one question at a time) │ NO ↓ PROCEED with diagnosis and mechanism design ``` ### Required Context (must have — ask if missing) - **The players:** Who are the parties? How many? Are they identifiable individuals, firms, nations, or anonymous members of a group? → Check prompt for: named parties, "we vs. they" language, player count → If missing, ask: "Who are the parties in this situation? Are they a small identifiable group or a large anonymous one?" - **The choices:** What are the "cooperate" and "defect" options for each player? → Check prompt for: specific behaviors like pricing, output levels, investment, restraint → If missing, ask: "What does cooperation look like in practice — what would each party have to do or give up? And what does defection look like — what is the tempting unilateral advantage?" - **The payoff structure:** Is defection dominant regardless of what others do? Or does the best response depend on what others choose? → Check prompt for: "no matter what they do," "everyone is better off if all cooperate but each has an incentive to cheat," outcomes from prior interactions → If missing, ask: "When you consider your best move — is it to defect regardless of what the other party does? Or does your best move depend on what they do?" - **Relationship horizon:** Is this a one-shot interaction or an ongoing relationship? How long is it expected to continue? → Check prompt for: contract duration, relationship history, expected future interactions → If missing, ask: "Is this a one-time interaction or an ongoing relationship? If ongoing, is there a foreseeable end date?" ### Observable Context (gather from prompt or documents) - **Prior defection history:** Have parties cheated before? Does each party know it? → Relevant for: assessing whether trust has already been destroyed, choosing repair strategies - **Observability:** Can each party monitor what others actually do, or only infer from outcomes? → Relevant for: mechanism design — hidden defection requires different solutions than visible defection - **Player composition stability:** Is the group of players stable, or do new entrants frequently disrupt existing arrangements? → Relevant for: Ostrom principle 1 (clear membership) and end-game defection risk ### Default Assumptions - If interaction type is unspecified: assume repeated indefinitely with low probability of each period being the last. - If payoff magnitudes are unspecified: treat the gain from unilateral defection as moderate — sufficient to tempt but not extreme. - If number of players is unspecified: assume two-player dilemma; flag multiperson extensions where they change the analysis. - If observability is unspecified: assume imperfect observability (parties can observe outcomes but not always attribute them to a specific defector). ### Questioning Guidelines Ask ONE question at a time, most critical first. Show what you already know before asking. State why you need the information. ## Process Use `TodoWrite` to track steps before beginning. ``` TodoWrite([ { id: "1", content: "Diagnose: confirm prisoners' dilemma vs coordination problem", status: "pending" }, { id: "2", content: "Map payoffs: build rough payoff table with cooperation surplus", status: "pending" }, { id: "3", content: "Assess discount rate: calculate cooperation sustainability threshold", status: "pending" }, { id: "4", content: "Score mechanism prerequisites: detection, clarity, certainty, size, repetition", status: "pending" }, { id: "5", content: "Select and design cooperation mechanism from resolution menu", status: "pending" }, { id: "6", content: "For commons/multiperson: apply Ostrom's design principles checklist", status: "pending" }, { id: "7", content: "Produce cooperation design plan with implementation steps", status: "pending" } ]) ``` --- ### Step 1: Diagnose the Game Type **ACTION:** Determine whether the situation is a genuine prisoners' dilemma, a coordination problem, or something else. This diagnosis determines the entire remedy. **WHY:** The treatments are fundamentally different. A prisoners' dilemma has a dominant strategy to defect — each player is better off defecting regardless of what others do. A coordination problem has multiple equilibria — once aligned on the same convention (QWERTY, driving on the right, common standards), no one wants to deviate unilaterally. Applying cooperation mechanisms to a coordination problem is wasted effort; what's needed is a focal point or a critical mass to tip behavior. **Two-question diagnostic:** 1. "If the other party cooperates, am I still better off defecting?" (unilateral defection payoff) 2. "If the other party defects, am I still better off defecting?" (defection-regardless test) If YES to both → prisoners' dilemma. Defection is dominant. Proceed through this skill. If NO to question 1 (defection hurts me when others cooperate) → coordination problem. The issue is aligning expectations, not suppressing defection. See coordination notes in References. If YES to question 1 but NO to question 2 → asymmetric game. One party may have a dominant defection strategy while the other's best response depends on context. Requires separate analysis. **Also check: is this zero-sum?** In a zero-sum game, every gain by one player comes at exactly equal cost to another. Zero-sum games have no cooperation surplus — there is nothing to gain from mutual restraint. The prisoners' dilemma is NOT zero-sum: both players are better off in the mutual cooperation cell than in the mutual defection cell. **Confirm the cooperation surplus exists:** There must be a combination of choices where all parties are better off than in the mutual-defection equilibrium. If no such combination exists, this is not a prisoners' dilemma. Mark Step 1 complete in TodoWrite. --- ### Step 2: Map the Payoffs **ACTION:** Construct a rough payoff table showing the four cells: (Cooperate, Cooperate), (Cooperate, Defect), (Defect, Cooperate), (Defect, Defect). For multiperson dilemmas, show how collective payoff changes as the number of cooperators rises. **WHY:** The payoff table makes the temptation and its cost concrete. Without it, the mechanism design is abstract. The payoff structure also determines which mechanisms are viable — specifically, the ratio of the one-period defection gain to the ongoing cooperation gain determines the discount-rate threshold (Step 3). **Standard prisoners' dilemma payoff ordering (for each player):** - Defect while other cooperates > Mutual cooperation > Mutual defection > Cooperate while other defects - In shorthand: T > R > P > S (Temptation > Reward > Punishment > Sucker) **Quantify if possible:** - One-period defection gain = T − R (what you gain in the short term by cheating) - Annual cooperation gain loss = R − P (what you lose each year if cooperation collapses) - Break-even interest rate (see Step 3): (R − P) / (T − R) **For multiperson / commons situations:** Replace the 2x2 table with a contribution schedule showing how each party's payoff changes as the number of cooperators increases. Key feature: each defector gains a fixed amount regardless of how many others defect, but spreads a cost across all cooperators. This is the "contribution game" structure. Mark Step 2 complete in TodoWrite. --- ### Step 3: Calculate the Discount-Rate Threshold **ACTION:** Determine the maximum interest rate (discount rate) at which sustained cooperation is rational. If the actual interest rate or impatience level is below this threshold, cooperation through repeated play is sustainable without external enforcement. **WHY:** The key insight of repeated-game analysis is that defection gains a short-term advantage but destroys long-term cooperation value. Whether defection is worth it depends on how much you value the future. If you are very impatient (high discount rate), the future is worth little and defection becomes attractive even knowing the relationship will collapse. If you value the future sufficiently (low discount rate), the prospect of losing ongoing cooperation outweighs the temptation to cheat today. **Formula:** Cooperation is self-sustaining if the interest rate r satisfies: ``` r < (R − P) / (T − R) ``` Where: - R = payoff from mutual cooperation (reward) - P = payoff from mutual defection (punishment) - T = payoff from defecting while other cooperates (temptation) - T − R = one-period gain from cheating - R − P = annual cost of losing the cooperative relationship **Worked example (from Ch. 3, Rainbow's End / B.B. Lean pricing):** - Mutual cooperation: $72,000 each per year (R) - Mutual defection: $70,000 each per year (P) - One-period defection gain: $110,000 − $72,000 = $38,000 (T − R) - Annual cost of collapsed cooperation: $72,000 − $70,000 = $2,000 (R − P) - Break-even rate: $2,000 / $38,000 = 5.26% per year - If actual interest rate > 5.26%: cooperation collapses; if < 5.26%: self-sustaining **What raises the sustainability threshold (makes cooperation easier):** - Longer shadow of the future: indefinite interactions, no known end date - Growing relationship value: stakes grow over time, making defection increasingly costly - Stable player composition: no new entrants who don't share the history - Frequent interactions: each "period" is shorter, making each defection opportunity less rewarding **What lowers the sustainability threshold (makes cooperation harder):** - High discount rates: impatience, financial distress, declining industry - End-game visibility: clear final period triggers backward-induction unraveling - Low cooperation surplus: R − P is small relative to T − R - Business booms: temporary windfalls make defection more tempting right now **End-game problem:** In a finite repeated game with a known final period, backward induction unravels cooperation all the way to round 1. Solution: eliminate the clear end-game — use indefinite time horizons, rolling contracts, or overlapping agreements so there is no obvious "last round." Mark Step 3 complete in TodoWrite. --- ### Step 4: Score the Punishment Mechanism Prerequisites **ACTION:** Evaluate the situation against five prerequisites for an effective punishment-based cooperation mechanism. Each gap identifies a specific design problem to solve. **WHY:** Punishment is the most common mechanism for sustaining cooperation. But punishment only deters defection if it meets specific structural requirements. A gap in any one of the five areas undermines the entire mechanism. Identifying which prerequisite is weak tells you exactly what the mechanism design needs to fix. **The five prerequisites:** **1. Detection** — Can defection be observed, attributed to the right party, and detected quickly? - Fast, accurate detection allows immediate targeted punishment, reducing the gain from cheating. - Slow or inaccurate detection gives defectors a long free ride before punishment arrives. - Ambiguous attribution (cannot tell WHO cheated, only that cheating occurred) forces blunt punishments that hurt cooperators too. - Design tool: make defection observable by structure — arrange for cheating to immediately surface (price-matching clauses put customers in charge of detection; lunar-calendar bid rotation made cheating immediately visible to rivals). **2. Clarity** — Are the rules of cooperation and the boundaries of acceptable behavior unambiguous? - If boundaries are complex, parties may cheat by mistake or fail to make a rational calculation. Tit-for-tat's great strength is its clarity: if you cheat, I cut prices immediately next period. No ambiguity. - Collusion cartels that fail often fail because what counts as cheating is unclear (price cuts vs. quality upgrades vs. extended credit terms). **3. Certainty** — Is punishment guaranteed when defection occurs? Is cooperation reliably rewarded? - Uncertain punishment (WTO-style multi-year adjudication where political considerations override facts) provides weak deterrence. - Design tool: make punishment automatic and mechanical — most-favored-customer clauses, automatic price-matching policies. **4. Size** — Is the punishment large enough to deter, but not so large that errors cause catastrophic spirals? - Minimum deterrent punishment is preferable: set punishment at the level required to make defection unprofitable, no larger. Larger punishments amplify errors. - When errors are possible (as they always are in practice), forgiveness of occasional defections is optimal — punishment should be as low as is compatible with deterrence. **5. Repetition** — Is there a sufficient "shadow of the future"? (Covered in Step 3 — confirm result applies here.) - Self-enforcing cooperation requires future value to exceed the one-period defection gain (the threshold from Step 3). Mark Step 4 complete in TodoWrite. --- ### Step 5: Select and Design the Cooperation Mechanism **ACTION:** Choose the appropriate mechanism from the resolution menu below. Mechanisms are ordered from lowest to highest external requirement. Select the lowest-level mechanism that is feasible given the prerequisites scored in Step 4. **WHY:** Not every situation requires the same intervention. Using heavy external enforcement when self-enforcement would work wastes resources and creates regulatory risk (antitrust exposure for firms). Using self-enforcement when the prerequisites are missing produces predictable failure. Matching mechanism to situation is the core design task. **Resolution Menu (escalating external requirement):** --- **Level 1 — Self-enforcing repeated play (tit-for-tat or generous variant)** *Use when:* discount rate is below threshold (Step 3 result), players interact repeatedly, detection is feasible. *How it works:* Players cooperate initially, then mirror the other's last move. The credible threat of future retaliation deters current defection. *Standard tit-for-tat:* Cooperate first; replicate opponent's last move every subsequent period. - Strengths: clear, nice (never initiates defection), provocable (punishment is immediate), forgiving (restores cooperation after one cooperative move). - Fatal flaw in noisy environments: any error or misperception triggers an alternating defection spiral (Hatfield-McCoy pattern). Each side punishes what it perceived as defection, but the other side is merely responding to the punishment. *Generous tit-for-tat (preferred in practice):* Cooperate first; punish sustained defection but forgive isolated defections. The tamarin monkey threshold: tolerate up to 1 defection, punish 2 consecutive defections. - Advantage: breaks punishment spirals caused by noise or misperception. - Rule: Do not respond to a single defection. If the other party defects twice in a row, switch to defect until they cooperate twice in a row. *Implementation checklist:* - [ ] Define what counts as cooperation and defection in operational terms - [ ] Set the monitoring interval (how quickly is defection detected and responded to?) - [ ] Choose forgiveness threshold (1 defection? 2 consecutive? context-dependent) - [ ] Communicate the strategy clearly to the other party — clarity is a prerequisite --- **Level 2 — Mutual promises with escrow or simultaneous commitments** *Use when:* Tit-for-tat is viable but trust is currently depleted; players need a credibility boost to restart cooperation. *How it works:* Both parties make simultaneous promises and deposit promised payments (or penalties for non-performance) in a neutral escrow account. Neither can renege without forfeiting the escrow. Converts soft promises into hard commitments. *Use cases:* Restart of cooperation after a defection episode; situations where one party is less patient and needs a structural guarantee; situations where the relationship is new and no reputation exists yet. --- **Level 3 — Reputation and linkage across multiple interactions** *Use when:* The dyadic interaction has insufficient cooperation surplus to sustain self-enforcement on its own, but the parties interact in multiple dimensions. *Reputation mechanism:* Public record of each party's cooperation history creates external cost for defection beyond the bilateral relationship. A firm that cheats on a pricing arrangement faces skepticism from future trading partners, lenders, and employees. Works best when: the reputation is observable to third parties who matter, defection is clearly attributable, and the relationship horizon extends far enough to make the reputation investment worthwhile. *Linkage mechanism:* Bundle multiple interactions so defecting in one dimension risks the entire relationship. Cooperation surplus across all linked interactions must exceed the temptation to defect in any one. Warning: linkage scales both gains and defection gains proportionally if all dimensions have identical payoff structures — benefit comes only from asymmetries across dimensions. --- **Level 4 — Third-party intervention and external enforcement** *Use when:* Self-enforcement is not viable (relationship is too short, discount rate too high, detection too imperfect), and parties cannot credibly commit to punishments themselves. *Options:* - **Contract enforcement:** Parties write an explicit agreement specifying cooperation terms and penalties for defection. A court or arbitrator enforces it. Requires: clear specification of what counts as defection (not always possible for tacit understandings like pricing). - **Third-party mediator/arbitrator:** A neutral third party with sufficient authority and interest in cooperation (e.g., Camp David mediator rewarding Egypt and Israel for cooperating). Third party provides both a focal point for what cooperation means and a punishment mechanism for defection. - **Regulatory prohibition of defection:** Government makes the defect option illegal (antitrust law prevents cartelization, but also prevents the cooperation problem from arising). Note: this works in both directions — antitrust also prevents self-enforcing collusion among competitors, which is why it must be used selectively. --- **Level 5 — Ostrom commons governance (multiperson dilemmas)** *Use when:* The dilemma involves a large group managing a shared resource (fishery, groundwater, pasture, shared infrastructure, open-source contribution, common standards). Apply all eight Ostrom design principles as a checklist. Each principle maps to a specific prerequisite gap: 1. **Defined boundaries** — Clear rules about who has the right to use the resource. Geographic, professional, or membership criteria. Prevents free-rider entry by outsiders. 2. **Rules match local conditions** — Usage rules (time restrictions, location restrictions, technology limits, quantity quotas) must be calibrated to what is actually detectable and enforceable in this specific context. Quantity quotas work well when quantities are easily observable; they fail for fish because catch size is hard to control exactly. Time-based and location-based rules are often more enforceable. 3. **Graduated sanctions** — Punishment starts low (verbal warning, direct approach to the violator) and escalates only for repeat or severe violations. First-offense fines are low; they ratchet up. This principle exists because light initial punishment maintains community relationships while still deterring escalation, and because the first violation might be a misunderstanding rather than deliberate defection. 4. **Automatic detection embedded in operations** — Design the governance system so monitoring happens as a byproduct of normal operations (rotation systems where the person with the good spot automatically notices if someone else is using it; team harvesting that makes solo overharvesting visible). Dedicated guard systems are costly and generate evasion; embedded detection is cheap and hard to game. 5. **Locally designed and adjusted rules** — The group that uses the resource has the information to design rules that are both effective and legitimate. Top-down management consistently fails because it lacks local knowledge of the resource, the technology, and the community norms. The group should design its own rules through a participatory process. 6. **Conflict resolution mechanisms** — Low-cost dispute resolution must be available to address perceived violations without escalating to punishment spirals. The first response to apparent cheating should be inquiry, not punishment. 7. **Recognition by external authority** — External governments must recognize the community's right to organize and enforce its own rules, not override or undermine local governance. 8. **Nested governance for large systems** — For large-scale resources, governance is organized in multiple layers — local groups handle local problems; coordination bodies handle cross-group issues. Monolithic centralized governance fails at scale; purely local governance fails at the system level. **Ostrom's warning:** "The dilemma never fully disappears, even in the best operating systems. No amount of monitoring or sanctioning reduces the temptation to zero. Effective governance systems cope better than others — they do not eliminate the problem." Mark Step 5 complete in TodoWrite. --- ### Step 6: For Multiperson Dilemmas — Assess Contribution Game Structure **ACTION:** If the dilemma involves more than two players and a public good or shared resource, assess the contribution game structure: each party's dominant strategy is to free-ride; collective optimum requires all to contribute. **WHY:** Multiperson prisoners' dilemmas have a specific feature that bilateral dilemmas lack: each defector's gain is fixed (they free-ride on others' contributions), but each defector imposes a cost spread across ALL cooperators. In the 4-player contribution game: contributing $1 to the pool raises total benefit by $2 (after doubling), but the contributor receives only $0.50 of the gain ($1.50 goes to others). This makes free-riding dominant regardless of what others do. **Contribution game checklist:** - [ ] Identify the collective good and who benefits from it regardless of contribution - [ ] Identify the private gain from free-riding and the collective cost - [ ] Assess whether the group is small enough for social sanctions to operate (village-scale vs. anonymous urban setting) - [ ] Assess whether punishment is available: can group members observe who contributed and impose social costs on defectors? - [ ] Note: experimental evidence shows people will pay a personal cost to punish free-riders (third-party punishment), which activates the dorsal striatum — the biological basis of cooperative norm enforcement Mark Step 6 complete in TodoWrite. --- ### Step 7: Produce the Cooperation Design Plan **ACTION:** Write a structured cooperation design plan covering the full analysis from Steps 1-6. **WHY:** The plan must be specific and actionable. "Use tit-for-tat" is not useful. "Define price cuts of more than 5% as defection, respond with a 10% price cut effective next catalog cycle, forgive single-period deviations, treat two consecutive deviations as intentional" is useful — it specifies the operational terms the parties need to implement. **HANDOFF TO HUMAN** — the agent produces the plan; the human negotiates, implements, and monitors. **Plan format:** ```markdown # Cooperation Design Plan ## Game Diagnosis **Type:** [Prisoners' Dilemma / Coordination Problem / Asymmetric / Not applicable] **Cooperation surplus exists:** [Yes/No — the mutual cooperation cell vs. mutual defection cell] **Payoff structure:** | | Other: Cooperate | Other: Defect | |---|---|---| | You: Cooperate | R = [value] | S = [value] | | You: Defect | T = [value] | P = [value] | **Dominant strategy:** [Defect / Cooperate / Context-dependent] ## Discount-Rate Assessment **One-period defection gain (T − R):** [value] **Annual cooperation value at stake (R − P):** [value] **Break-even interest rate:** [calculation and result] **Self-enforcement viable?** [Yes if actual rate < break-even / No if above] ## Prerequisite Gaps | Prerequisite | Status | Gap Description | |---|---|---| | Detection | [Strong/Weak/Missing] | [specific gap] | | Clarity | [Strong/Weak/Missing] | [specific gap] | | Certainty | [Strong/Weak/Missing] | [specific gap] | | Size (minimum deterrent) | [Strong/Weak/Missing] | [specific gap] | | Repetition / shadow of future | [Strong/Weak/Missing] | [specific gap] | ## Recommended Mechanism **Level selected:** [1–5 from resolution menu] **Mechanism:** [Name and brief description] **Rationale:** [Why this level fits the situation] ## Implementation Steps 1. [Operational definition of cooperation and defection in this context] 2. [Monitoring arrangement: how, by whom, with what frequency] 3. [Response rule: specific trigger and specific response] 4. [Forgiveness threshold: when to restore cooperation] 5. [Communication plan: how to make the strategy clear to all parties] 6. [Escalation path: if self-enforcement fails, what is the next level?] ## Risks and Anti-Patterns - **End-game defection risk:** [Is there a visible final period? How to address?] - **Punishment spiral risk:** [Is generous tit-for-tat needed? What forgiveness threshold?] - **Player composition risk:** [Are new entrants expected? How does the mechanism handle them?] - **Boom/bust defection timing:** [When is defection temptation highest? Special provisions needed?] ## For Commons/Multiperson Situations Ostrom principle compliance: - [ ] Defined boundaries - [ ] Rules match local conditions - [ ] Graduated sanctions - [ ] Automatic detection embedded in operations - [ ] Locally designed rules - [ ] Conflict resolution mechanisms - [ ] External recognition - [ ] Nested governance (for large systems) ``` Mark Step 7 complete in TodoWrite. ## Inputs - **Situation description:** Who are the players? What choices do they have? What happens to each player under each combination of choices? - **Relationship context:** How long has the relationship been ongoing? Is it expected to continue indefinitely or does it have a clear end date? - **Observability:** Can each party monitor what others actually do, or only observe outcomes? - **Prior cooperation history:** Have parties cooperated or defected in the past? What happened? ## Outputs - **Cooperation Design Plan** (Markdown) — complete structured plan with diagnosis, payoff table, discount-rate threshold, prerequisite gap assessment, mechanism selection and implementation steps, risk register, and Ostrom compliance checklist where applicable - **Decision rationale** — for each recommendation, the WHY (which prerequisite is met or missing, why this mechanism level was chosen) ## Key Principles - **Diagnosis before mechanism** — the correct remedy depends entirely on the game type. Applying cooperation tools to a coordination problem (or vice versa) is worse than doing nothing because it misidentifies the problem and wastes resources. Always confirm whether defection is dominant regardless of others' choices. - **The cooperation surplus is the prize** — the difference between mutual cooperation and mutual defection payoffs is what parties are fighting over. If this surplus is small relative to the temptation to defect, self-enforcement requires either an extremely low discount rate or an external mechanism. The surplus size determines the viable mechanism space. - **The future must be sufficiently valuable** — cooperation is self-enforcing only when the prospect of losing ongoing cooperation outweighs the one-period temptation gain. This is not a moral claim; it is an arithmetic one. Calculate the break-even discount rate explicitly. Fuzzy talk about "long-term relationships" is insufficient. - **Punishment must be targeted, certain, and proportionate — not maximal** — the temptation to set catastrophic punishments ("nuke any country that breaks the tariff agreement") is wrong because errors will occur. When errors occur, catastrophic punishments are either not credible or produce catastrophic outcomes. Set punishment at the minimum level that makes defection unprofitable. - **Standard tit-for-tat is fragile in noisy environments** — the real world has errors and misperceptions. Tit-for-tat cannot distinguish intentional defection from noise, and its perfect responsiveness creates punishment spirals. Generous tit-for-tat (2-consecutive-defections threshold) preserves punishment credibility while tolerating noise. - **Cooperation and coordination are different problems** — cooperation problems (prisoners' dilemma) have dominant strategies to defect; the challenge is suppressing that incentive. Coordination problems have no incentive to deviate from the prevailing convention once everyone is on it; the challenge is getting to the right convention and escaping a bad one. Cigarette advertising bans, QWERTY entrenchment, and racial tipping are coordination problems. Arms races, price wars, and overfishing are cooperation problems. - **Ostrom: no governance system eliminates the dilemma** — the goal is a governance system that manages the dilemma better than alternatives, not one that eliminates it. Perfection is not the standard. Practical improvement — fewer defections, faster detection, lower cost of enforcement — is. ## Examples **Example 1: Pricing cartel between two mail-order retailers** Situation: Rainbow's End (RE) and B.B. Lean (BB) both price shirts at $70 when both could price at $80 and each earn $72,000 vs. $70,000 per year. Each firm cuts to $70 because it's the dominant strategy: cutting while the other holds at $80 yields $110,000; holding at $80 while the other cuts yields only $24,000. Diagnosis: Classic 2-player prisoners' dilemma. T=$110k, R=$72k, P=$70k, S=$24k. Defection dominant for both. Discount-rate calculation: (R−P)/(T−R) = ($72k−$70k)/($110k−$72k) = $2k/$38k = 5.26%. If prevailing interest rate < 5.26%, tacit cooperation at $80 is self-sustaining. Mechanism: Level 1 (self-enforcing repeated play). Detection: price lists are publicly observable. Clarity: define "defect" as cutting below $80. Response: immediately match any price cut in next catalog. Forgiveness: if other party restores $80 pricing, match that too. Communication: a "most-favored-customer" clause makes the automatic response policy public, removing ambiguity. Anti-pattern avoided: no explicit agreement is reached (antitrust risk); cooperation is purely tacit. --- **Example 2: Fishery commons overexploitation** Situation: New England fishing fleet: each captain has incentive to catch as much as possible before others do; result is collapse of species after species (Atlantic halibut, ocean perch, haddock). Diagnosis: Multiperson prisoners' dilemma (contribution game). Each additional catch by one captain reduces the stock for all others. Dominant strategy: fish aggressively regardless of what others do. Discount-rate calculation: Not determinative on its own — relationship continues indefinitely but individual boats can't unilaterally enforce rules against strangers. Mechanism: Level 5 (Ostrom commons governance). Apply 8-principle checklist: 1. Boundaries: issue licenses to fish specific species in specific zones — clear membership 2. Rules match conditions: seasonal closures and gear restrictions (net size) — more observable than quantity quotas 3. Graduated sanctions: first violation = warning + education; second = fine; third = license suspension 4. Automatic detection: rotating assignment to prime fishing zones creates natural monitoring — the assigned captain notices unauthorized use immediately 5. Local design: fishing community designs the quota and rotation rules with knowledge of local conditions, not federal agency 6. Conflict resolution: fishing association mediation before formal sanction 7. External recognition: state and federal agencies recognize community fishing governance authority 8. Nested governance: local associations handle local waters; interstate compact handles migratory species --- **Example 3: Coordination problem misdiagnosed as cooperation problem** Situation: Ivy League colleges keep overspending on athletics even though the relative standings stay the same. "Each school would be better off if we all limited spring training to one day." Diagnosis check: "If other schools limit training, should I limit training?" → Yes, my performance improves no more than theirs, but I save costs. "If other schools don't limit training, should I limit training?" → No, I'd be at a disadvantage. This is NOT a prisoners' dilemma. Defection is NOT dominant regardless of others' choices. The best response to "others cooperate" is to cooperate; the best response to "others defect" is to defect. This is a coordination problem. Mechanism: Not Level 1-5 from the resolution menu. Instead: establish a focal point for the cooperative equilibrium through a collective agreement with clear enforcement (the Ivy League agreement limiting spring training to one day). Once the convention is established and everyone expects everyone else to comply, compliance becomes self-sustaining without punishment — because no one wants to be the only school overdoing training when no one else is. Key distinction that matters: if this were a genuine prisoners' dilemma, the agreement would keep collapsing despite everyone's stated preference for cooperation. In coordination problems, a credible agreement is usually sufficient because there is no dominant strategy to defect — just a fear that others won't cooperate. ## References - For the Ostrom 8-principle checklist with detailed examples and design notes, see [ostrom-commons-governance.md](references/ostrom-commons-governance.md) - For the resolution menu with full specification of each mechanism level, see [resolution-menu.md](references/resolution-menu.md) - For the cooperation vs. coordination distinction with examples, see [cooperation-vs-coordination.md](references/cooperation-vs-coordination.md) - Source: *The Art of Strategy*, Dixit & Nalebuff, Chapter 3 (pp. 74–105) and Chapter 9 (pp. 254–280) ## License This skill is licensed under [CC-BY-SA-4.0](https://creativecommons.org/licenses/by-sa/4.0/). Source: [BookForge](https://github.com/bookforge-ai/bookforge-skills) — The Art of Strategy: A Game Theorist's Guide to Success in Business and Life by Avinash K. Dixit, Barry J. Nalebuff. ## Related BookForge Skills This skill is standalone. Browse more BookForge skills: [bookforge-skills](https://github.com/bookforge-ai/bookforge-skills)

path: references/cooperation-vs-coordination.md
content: # Cooperation vs. Coordination: Two Different Problems, Two Different Remedies

Source: Dixit & Nalebuff, *The Art of Strategy*, Chapter 9 (pp. 254–280)

---

## The Core Distinction

**Cooperation problem (prisoners' dilemma):**
Defection is the dominant strategy — the best response regardless of what others do. Everyone would be better off if all cooperated, but each individual has an incentive to defect even when everyone else cooperates. The challenge is suppressing the incentive to defect.

**Coordination problem:**
There is no dominant strategy to deviate from the prevailing equilibrium. Once enough people are doing the same thing, no individual benefits from switching alone. The challenges are: (1) getting to a good equilibrium in the first place, (2) escaping a bad equilibrium once established, and (3) preventing tipping to an inferior equilibrium.

**The diagnostic question:**
"If everyone else cooperates, do I still benefit from defecting?"
- YES → Prisoners' dilemma (dominant defection strategy). Use cooperation mechanisms (Levels 1-5).
- NO → Coordination problem. Use focal points, conventions, and tipping mechanisms.

---

## Cooperation Problems: Key Features

**Defining feature:** Defection dominant regardless of others' choices.

**Common manifestations:**
- Price wars between competitors (each firm benefits from cutting prices regardless of what the other does)
- Overfishing (each captain benefits from catching more regardless of what others do)
- Arms races (each party benefits from building arms regardless of what others do)
- Advertising wars (each firm must advertise because rivals do, but collective advertising spend is waste)
- Free-riding on public goods (each individual benefits from not contributing regardless of others' contributions)
- Overworking in relative-performance evaluations (studying more improves rank regardless of what others study)

**Remedy:** Suppress the dominant defection strategy through punishment mechanisms, external enforcement, repeated play, escrow, or governance structures. The cooperation surplus (value of mutual cooperation over mutual defection) is the resource being captured.

**Key diagnostic test:** In the payoff table, check whether the column "defect" dominates the column "cooperate" for all players. If yes, prisoners' dilemma confirmed.

---

## Coordination Problems: Key Features

**Defining feature:** Multiple equilibria, each self-sustaining once adopted. No one wants to deviate unilaterally from the prevailing convention. The problem is not suppressing defection — it is getting to the right equilibrium.

**Three sub-types:**

### Type A: Pure Coordination (no equilibrium is clearly better — just need alignment)
Example: Two people want to meet in New York but didn't specify where. Both know the prominent places (Times Square, Empire State Building). Either meeting point is fine; the only requirement is choosing the same one. Thomas Schelling called this a "focal point" — the natural, salient choice that people gravitate toward without communication.

**Remedy:** Establish a focal point (the most prominent, natural, or historically precedented option) and communicate it. Communication alone is usually sufficient because both parties want the same outcome.

### Type B: Inferior equilibrium lock-in (one equilibrium is better, but history chose the worse one)
Examples: QWERTY keyboard, gasoline engines, light-water nuclear reactors. A historical accident gave one option a head start. The bandwagon effect locked that option in: the more people use it, the more new users choose it, reinforcing its dominance. Even if a better alternative exists (Dvorak keyboard), switching requires coordinated action by enough people to tip the equilibrium.

**Key insight:** History matters. The option that happened to get an early lead may persist even when it is technically inferior, because superior alternatives never get a chance to accumulate the learning and network effects needed to catch up.

**Remedy:** Identify the tipping point (the fraction of users who need to switch to make the new equilibrium self-sustaining). Coordinate a critical mass to switch simultaneously or in a short burst. A short, intense campaign is more effective than gradual pressure because it tips the equilibrium all at once rather than allowing slow reversion. A major employer or standard-setter (government, large firm) switching can provide enough of a toehold to start the bandwagon rolling toward the better equilibrium.

**Anti-remedy:** Gradual voluntary switching without a mechanism for coordination. Each individual's switching costs exceed their individual benefit; only when enough people switch simultaneously does the benefit materialize. Gradual pressure dissipates without reaching the tipping point.

### Type C: Coordination with spillovers (each person's choice imposes costs or benefits on others)
Examples: Highway congestion (more drivers on the Bay Bridge imposes delay on all other drivers), car size arms race (driving a larger car makes lighter cars less safe, inducing others to buy larger cars), neighborhood tipping (racial composition equilibria).

**Key insight:** The Nash equilibrium (where each individual optimizes given others' choices) may not be the social optimum because spillover effects are not priced. Too many people drive on the Bay Bridge because each driver doesn't pay for the delay they impose on others.

**Remedy:** Price the spillover (congestion tolls), regulate the behavior (CAFE fuel economy standards that shift the mix of cars), or use public information to reshape expectations (preventing panic selling of houses by suppressing "For Sale" signs and providing property value insurance, as Oak Park, Illinois did).

---

## Decision Tree for Choosing the Remedy

```
Is defection dominant regardless of others' choices?
        │
       YES → Prisoners' dilemma
        │     → Use resolution menu (Levels 1-5)
        │     → Focus on punishment mechanisms and cooperation prerequisites
        │
       NO → Coordination problem
              │
              Is there only one possible equilibrium, just need alignment?
              │
             YES → Pure coordination
              │     → Find/create a focal point
              │     → Communicate clearly; explicit agreement may be all that's needed
              │
              NO → Are we locked into an inferior equilibrium?
                    │
                   YES → Inferior lock-in (bandwagon problem)
                    │     → Find the tipping point
                    │     → Coordinate a critical mass to switch simultaneously
                    │     → Short intense enforcement > long gradual pressure
                    │
                    NO → Coordination with spillovers
                          → Price the externality (Pigouvian tax/subsidy)
                          → Or regulate to shift the equilibrium
                          → Or redesign the game so choices internalize spillover costs
```

---

## Case Comparisons: Same Surface Appearance, Different Game

| Situation | Prisoners' dilemma or coordination? | Why |
|---|---|---|
| Price war between two retailers | Prisoners' dilemma | Cutting price is dominant regardless of rival's pricing |
| Ivy League athletic spending arms race | Coordination problem | If others limit training, limiting training is best response too |
| Overfishing | Prisoners' dilemma | Catching more is dominant regardless of others' behavior |
| QWERTY keyboard lock-in | Coordination (inferior equilibrium) | Everyone learns QWERTY because everyone else uses it; no one benefits from switching alone |
| Cigarette advertising wars | Prisoners' dilemma | Each company must advertise defensively regardless of rivals |
| Racial neighborhood tipping | Coordination with spillovers | Households' moving decisions affect others' moving incentives |
| SUV arms race / car size | Coordination with spillovers | Each large car makes others less safe, inducing more large cars |
| Tax compliance norms | Coordination (multiple equilibria) | If most evade, evading is best response; if most comply, complying is safer |

---

## The Hotelling Median Voter / Product Homogeneity Pattern

A specific coordination outcome: when firms or political parties compete for customers/voters on a single dimension, both converge to the median position. Neither benefits from deviating to the flank while the other is at the center, because the center captures more votes/customers.

This produces excessive homogeneity — political parties that sound alike, products that are indistinguishable ("cider is too homogeneous" — Harold Hotelling, 1929).

This is NOT a prisoners' dilemma. Deviating to an extreme position when the rival is at the center REDUCES your market share. The self-interest of each party produces homogenization, not the mutual-defection trap of a prisoners' dilemma.

**Remedy:** Zoning regulations on product positioning, mandatory product differentiation, or structural changes that remove the single-dimension competition (adding more dimensions of competition changes the equilibrium structure).

---

## When Remedies Fail Because the Diagnosis Was Wrong

**Applying cooperation mechanisms to a coordination problem:** Parties sign agreements, use escrow, and set up punishment systems — but none of this is needed because no one has an incentive to defect unilaterally anyway. Resources are wasted on enforcement for a problem that would have self-resolved through alignment.

**Applying coordination mechanisms to a prisoners' dilemma:** Establishing a focal point or achieving alignment on a convention does nothing to suppress the dominant defection strategy. Parties agree on what cooperation looks like and then defect anyway because defection is dominant. The agreement collapses because signing it was cheap and defecting on it is profitable.

**The diagnostic test is therefore essential before any remediation effort:**
1. Build the payoff table
2. Check whether defection is dominant
3. Choose the remedy type accordingly


path: references/ostrom-commons-governance.md
content: # Ostrom's 8 Design Principles for Commons Governance

Source: Elinor Ostrom (Indiana University), derived from case studies of successful and unsuccessful attempts to manage common-pool resources — fisheries, groundwater, pastures, forests. Nobel Prize in Economics, 2009.

## The Core Problem

A commons (shared resource) faces a multiperson prisoners' dilemma. Each user has a dominant strategy to overexploit because:
- Each unit they take is a private gain
- The cost of depletion is spread across ALL users
- If others will overexploit anyway, restraint is irrational; if others restrain, you capture extra gain by not restraining

Result without governance: tragedy of the commons — collapse of the resource.

## Ostrom's Warning

> "The dilemma never fully disappears, even in the best operating systems. No amount of monitoring or sanctioning reduces the temptation to zero. Instead of thinking of overcoming or conquering tragedies of the commons, effective governance systems cope better than others."

The goal is not elimination of the dilemma but management of it. Set realistic expectations.

---

## The 8 Design Principles

### Principle 1: Defined Boundaries

**What:** Clear rules identifying who is a member of the governing group — who has the right to use the resource.

**Criteria for membership:** Geography (fishing zone), residence (local watershed), occupation (licensed fishermen), ethnicity or community membership (historical commons), or market mechanisms (auction entry fee or purchased license).

**Why it matters:** Without defined membership, new entrants can continuously dilute the cooperation arrangement. Every new member who does not share the history and social norms of the group weakens the enforcement mechanism. Open access destroys commons governance.

**Design question:** "Can we unambiguously tell whether a person is or is not entitled to use this resource?" If not, the governance system cannot close its borders to free-riders.

**Example:** New England fishing licenses tied to specific vessel/captain combinations and species — outsiders cannot join the pool informally.

---

### Principle 2: Rules Match Local Conditions

**What:** Usage restrictions (time, location, technology, quantity) must be calibrated to what is detectable and controllable in this specific resource context.

**Why it matters:** Top-down governance consistently imposes inappropriate rules because it lacks local knowledge of the resource, the technology for exploiting it, and the practical feasibility of detection. Quantity quotas for fish fail because catch size is difficult to observe exactly and hard for even well-intentioned fishermen to control precisely. Seasonal closures and gear restrictions (net size, mesh size) are more enforceable because violations are visible.

**Design question:** "What can a community member actually observe about compliance or violation during their normal operations?"

**Rule types and their observability:**
| Rule type | Observability | Example |
|---|---|---|
| Quantity quotas | Low (fish are underwater) | Fishing quota — rarely effective alone |
| Gear/technology restrictions | High (equipment is visible) | Net mesh size, hook count limits |
| Time restrictions (seasons) | High (calendar is public) | Open/closed seasons for hunting, fishing |
| Location restrictions | Moderate (rotation visible) | Inshore rotation rights, assigned fishing zones |
| Water/resource flow | High when metered | Irrigation water from storage tank |

**Anti-pattern:** Federal fishery managers imposing quantity-based individual transferable quotas without the monitoring infrastructure to enforce them — compliance rates drop, black market develops.

---

### Principle 3: Graduated Sanctions

**What:** Punishment for violations starts light and escalates only for repeat or severe infractions.

**Scale:**
1. Direct approach to violator + verbal request to resolve the problem
2. Public warning / social shame within the community
3. Small fine (first or second offense)
4. Escalating fines for repeated violations
5. Loss of future rights / suspension
6. Expulsion from the community
7. Criminal prosecution (extreme cases)

**Why it matters:** First violations are often genuine errors, misunderstandings, or emergency situations (a fisherman fighting for survival may take more than their quota — this is the "extreme situation" that warrants forgiveness). Severe punishment for a first violation destroys community relationships unnecessarily and may not be credible. Light initial punishment maintains social cohesion while still deterring casual defection. Punishment credibility increases because light punishments will actually be administered, whereas community members resist invoking catastrophic punishments for minor violations.

**Design question:** "Would community members actually be willing to enforce this sanction against a neighbor? If not, reduce the sanction until they would."

**Connection to tit-for-tat:** Graduated sanctions are the commons governance analogue to generous tit-for-tat — tolerate occasional defections, respond firmly to sustained or repeated defections.

---

### Principle 4: Automatic Detection Embedded in Operations

**What:** Design the governance system so monitoring happens as a natural byproduct of how participants normally use the resource — not as a separate, costly guard function.

**Why it matters:** Dedicated monitoring is expensive, generates adversarial relationships, and creates an evasion game (cheat when the guard isn't watching). Embedded detection is cheaper, harder to time, and creates positive incentives for community members to report violations (because the person who has the good spot has the strongest incentive to report the person illegally using it).

**Design patterns:**
- **Rotation systems:** Assign rights to desirable resource areas on rotation. The current assignee naturally notices unauthorized use and has a strong incentive to report it. No guards needed.
- **Team operations:** Require harvesting from forests or commons to be done in teams. Solo operations are detectable by their absence from the team. Mutual monitoring emerges from the work structure.
- **Information asymmetry exploitation:** Rules on what constitutes permissible use are calibrated so that violations are obvious to any participant but not easily hidden. Fish quantity is hard to observe; gear type is easy.
- **Market-embedded monitoring:** Buyers who receive resources from the commons have a commercial incentive to verify that sellers have legitimate extraction rights (otherwise their own purchase is at legal risk).

**Anti-pattern:** A fishery that relies on self-reported catch data without any independent verification mechanism. Systematic over-reporting is individually rational.

---

### Principle 5: Locally Designed and Adjusted Rules

**What:** The community using the resource should design and modify its own rules through a participatory process, rather than having rules imposed by a central authority.

**Why it matters:** Local users have three critical information advantages over external managers:
1. Knowledge of the resource's actual behavior, seasonal patterns, and vulnerabilities
2. Knowledge of the technology and which restrictions are practically feasible
3. Knowledge of the community norms, relationships, and which sanctions are credible

Top-down governance consistently fails because it lacks all three. Rules that look sensible in a capital city fail in the field because they assume the wrong detection mechanisms, impose unenforceable quantity limits, or apply uniform rules to resources that have highly variable local characteristics.

**Design question:** "Have the people who will live with these rules had genuine input into designing them? Do the rules reflect their knowledge?"

**Also covers:** The right of community members to modify rules over time as conditions change. Static governance fails in dynamic resource environments.

---

### Principle 6: Conflict Resolution Mechanisms

**What:** Low-cost, rapid dispute resolution must be available so that perceived violations can be addressed without escalating to punishment spirals or formal legal proceedings.

**Why it matters:** Not every apparent violation is intentional. Many require investigation before punishment. When conflict resolution is expensive or slow, aggrieved parties take unilateral action (escalation, retaliation), which triggers counter-retaliation — exactly the punishment spiral that destroys cooperation. The first response to apparent cheating should be inquiry and negotiation, not punishment.

**Mechanisms:**
- Community meeting or council to address specific disputes
- Designated mediator with community trust
- Investigation protocol before sanctions are imposed
- Provision for correcting genuine errors without punishment

**Connection to governance:** This principle is the commons analogue to the tit-for-tat problem with noisy environments. In the real world, apparent defection is often noise, not defection. Conflict resolution is the mechanism for distinguishing the two before punishment is applied.

---

### Principle 7: Recognition by External Authority

**What:** External governments must recognize the community's right to organize and enforce its own governance rules rather than overriding, undermining, or ignoring local governance structures.

**Why it matters:** Local governance cannot function if external legal authority can nullify its decisions. A fishing community that designs rules for its commons has no enforcement power if those rules can be overridden by a federal agency, violated without legal consequence, or ignored by outsiders who know local enforcement has no standing.

**Design question:** "Does the relevant government authority recognize this community's governance structure as legitimate and enforceable?"

**Common failure mode:** Federal governments replace community governance with top-down management, destroying local knowledge and community accountability structures, then suffer from the information problems Principle 5 predicts.

---

### Principle 8: Nested Governance for Large Systems

**What:** For large-scale resources that cross community boundaries, governance is organized in multiple nested layers. Local groups govern local issues; coordination bodies handle cross-boundary issues; regional or national bodies handle system-level coordination.

**Why it matters:** Purely local governance fails when the resource crosses local boundaries (migratory fish, river watersheds, transboundary aquifers). Purely central governance fails because it lacks local knowledge (see Principle 5). The solution is hierarchical governance: each level handles the scale of problem it can actually manage with the information it has.

**Example structure:**
- Local fishing association → governs inshore zone, specific species, seasonal patterns
- Regional fishing council → coordinates between local associations for shared species, migratory routes
- National/international body → manages international waters, highly migratory species (tuna, whales)

**Anti-pattern:** A single national agency trying to manage all levels without local governance structures → information failure at local level; a set of purely local associations with no coordination mechanism → defection at the cross-boundary level.

---

## Applying the Checklist

Score each principle as: Met / Partially Met / Not Met / Not Applicable

| Principle | Status | Gap | Proposed fix |
|---|---|---|---|
| 1. Defined boundaries | | | |
| 2. Rules match conditions | | | |
| 3. Graduated sanctions | | | |
| 4. Automatic detection | | | |
| 5. Locally designed | | | |
| 6. Conflict resolution | | | |
| 7. External recognition | | | |
| 8. Nested governance | | | |

Any "Not Met" is a specific gap that the governance design must address. Priority order: Principles 1-4 are typically the most critical for functional governance; Principles 5-8 determine sustainability over time.


path: references/resolution-menu.md
content: # Resolution Menu: Cooperation Mechanism Levels

Each level assumes the prerequisites of levels below it are insufficient or unavailable.
Select the lowest level that is feasible given the situation's prerequisites.

---

## Level 1: Self-Enforcing Repeated Play

**Prerequisite check:**
- [ ] Interest rate / discount rate is below the break-even threshold: r < (R−P)/(T−R)
- [ ] Interaction is expected to continue indefinitely (or at least without a known final period)
- [ ] Detection is feasible (defection can be observed within a reasonable timeframe)
- [ ] Players are identifiable (defection can be attributed to the correct party)

**Mechanism: Tit-for-tat (two variants)**

### Standard Tit-for-Tat
Rule: Cooperate in period 1. In every subsequent period, do what the other player did in the previous period.

Properties (Axelrod's four principles):
- **Clear:** The rule is simple. The opponent does not have to guess what you will do; the link between their behavior and your response is unambiguous.
- **Nice:** Never initiates defection. No first-mover defection advantage.
- **Provocable:** Defection is punished immediately — no free rides.
- **Forgiving:** After one cooperative move by the other party, cooperation is immediately restored. No grudges.

Fatal flaw in noisy environments: Any misperception or error produces an alternating defection spiral. Party A defects by mistake in round 11. Party B retaliates in round 12. Party A (who cooperated in round 11) retaliates against B's retaliation in round 13. Round 14: B retaliates again. The pattern alternates indefinitely until another error accidentally restores cooperation or both defect permanently. Real-world example: Hatfield-McCoy feud — no one remembers what started it, but retaliation is perpetual. Middle East cycles of reprisal follow the same structure.

**Do not use** standard tit-for-tat when:
- Observability is imperfect (outcomes observable but attribution uncertain)
- Communication between parties is limited
- There is a history of prior misperceptions
- The relationship has experienced recent turbulence

### Generous Tit-for-Tat (recommended for most real-world applications)

Rule: Cooperate in period 1. Tolerate up to 1 isolated defection. Punish if the other party defects twice consecutively. Resume cooperation when the other party cooperates twice consecutively.

Source: Cotton-top tamarin monkey experiments — stable cooperation emerged with this exact rule. Consistent with subsequent Axelrod tournament results when error/noise was introduced.

Why 2-consecutive threshold works:
- Single defection may be noise (error, misperception, emergency). Punishing it starts a spiral.
- Two consecutive defections are highly unlikely to both be noise. This is deliberate defection.
- The threshold is clear and simple enough to be mutually understood.

**Operational implementation steps:**
1. Define "cooperate" and "defect" in specific, observable, operational terms (e.g., "cooperate" = maintain price at or above $X; "defect" = undercut by more than $Y)
2. Set monitoring interval (how frequently are outcomes observed?)
3. Establish response lag (how quickly can punishment be implemented?)
4. Communicate the rule explicitly (or create structural clarity through most-favored-customer clauses, price-matching policies, etc.)
5. Document forgiveness rule in advance — both parties must know cooperation will be restored

**Anti-patterns:**
- Defining defection too loosely (ambiguous trigger → false positives → unnecessary spirals)
- Setting punishment too harshly (catastrophic punishment → not credible when errors occur)
- Using tit-for-tat in a market with hidden price cuts (undetectable defection makes the strategy impossible)

---

## Level 2: Mutual Promises with Escrow or Simultaneous Commitments

**When Level 1 fails because:** Discount rate is acceptable but trust has been depleted by prior defection; parties believe the other will defect; no mechanism to make future cooperation credible.

**Mechanism:**
Both parties simultaneously commit to cooperative action AND deposit a performance bond (or penalty payment) in a neutral escrow account. If either party defects, the escrow funds are paid to the other party or forfeited to a third party.

**Design elements:**
- Escrow holder: neutral third party with no stake in the outcome (law firm, bank, arbitration service)
- Trigger definition: what counts as defection must be clearly specified and verifiable by the escrow holder
- Bond size: must exceed the one-period defection gain (T−R); otherwise defection plus forfeiting the bond is still profitable
- Duration: escrow is maintained for the agreed cooperation period; released upon successful completion
- Amendment process: how do the parties modify the agreement if circumstances change?

**Limitation:** Requires explicit agreement on what constitutes defection. Works for discrete, observable commitments. Does not work for tacit cooperation arrangements where defection is continuous and ambiguous.

**Example:** Camp David Accords — US provided explicit economic rewards (external escrow, essentially) to both Egypt and Israel conditional on maintaining the peace agreement. The third party with an interest in cooperation funded the escrow.

---

## Level 3: Reputation and Linkage

### Reputation Mechanism

**When to use:** The direct bilateral relationship has insufficient cooperation value, but the parties care about their reputation with third parties (customers, future partners, lenders, regulators, employees).

**How it works:** Defection in the current relationship damages the party's reputation with observers who will matter in future relationships. This creates an indirect future cost beyond the bilateral punishment.

**Reputation effectiveness conditions:**
- Defection must be observable to relevant third parties (not just the bilateral partner)
- Defection must be clearly attributable (cannot hide behind noise or ambiguity)
- The reputational audience must be substantial — the parties must have future interactions with people who will care
- Reputation recovery is slow — the damaged party must continue in the market long enough for reputation to have positive value

**Design question:** "Who observes this interaction besides the two parties? Do those observers affect the defector's future?" If the answer is no one significant, reputation alone will not sustain cooperation.

### Linkage Mechanism

**When to use:** Multiple dimensions of interaction between the same parties; defection in one dimension can be punished across multiple dimensions; the total cooperation surplus across all linked dimensions exceeds the temptation to defect in any one.

**How it works:** Bundle multiple interactions into a single relationship. "If you defect on pricing, we will also defect on delivery terms, quality standards, and the three other dimensions of our relationship."

**Critical limitation:** If all dimensions have identical payoff structures (same T, R, P, S), then linking them scales both the cooperation gain AND the defection gain proportionally, leaving the break-even interest rate unchanged. The ratio (R−P)/(T−R) is the same for the bundle as for any individual dimension.

Linkage only helps when dimensions are asymmetric — some dimensions have low defection temptation (high R−P relative to T−R) while others have high temptation. Bundling transfers sustainability from the low-temptation dimension to the high-temptation one.

**Multiproduct interaction warning (from Ch. 3):** Cheating on a multiproduct relationship brings the prospect of multiproduct retaliation, but also the temptation of multiproduct cheating simultaneously. These forces cancel if payoff structures are identical across products. Do not assume multiproduct relationships automatically sustain cooperation better than single-product relationships.

---

## Level 4: Third-Party Intervention and External Enforcement

### Explicit Contract Enforcement

**When to use:** Self-enforcement is not viable; parties cannot write credible unilateral punishment threats.

**Requirements:**
- Clear, verifiable specification of what cooperation and defection mean (cannot leave this ambiguous)
- Enforcement authority with jurisdiction and willingness to act
- Evidence mechanism: how will defection be proven?
- Proportionate remedy: what is the contracted consequence for defection?

**Limitation:** Many cooperation arrangements cannot be fully specified in a contract. "Do not undercut on price" is straightforward. "Maintain service quality at the level expected by our customers" is not. Contracts work for discrete, observable, attributable defections.

**Antitrust risk for firms:** Explicit agreements among competitors to cooperate on pricing or output are illegal in most jurisdictions. External enforcement through contract is not available for cartel arrangements — this is precisely why tacit self-enforcement mechanisms (Levels 1-3) are commercially important.

### Third-Party Mediator or Arbitrator

**When to use:** Parties cannot credibly commit to punishments themselves; a neutral third party has both authority and interest in the cooperative outcome.

**What the mediator provides:**
1. Focal point: the mediator defines what cooperation means (resolves the "clarity" prerequisite gap)
2. Verification: the mediator monitors compliance (resolves the "detection" gap)
3. Punishment: the mediator imposes consequences that neither party could credibly threaten unilaterally

**Mediator requirement:** The mediator must have either direct authority to impose consequences OR enough leverage over both parties (economic rewards, reputational influence, legal authority) that their judgment matters.

**Example:** US role at Camp David — neither Egypt nor Israel could credibly reward each other's cooperation. The US, with economic and military assistance to offer both, could.

### Regulatory Prohibition of the Defect Option

**When to use:** The defection option itself can be made illegal or structurally unavailable, eliminating the dominant strategy.

**How it works:** Rather than punishing defection after the fact, the regulation removes the defection choice from the game. Cigarette advertising ban (1968): TV advertising was a prisoners' dilemma for cigarette companies — each had to advertise because others did, even though collective advertising budgets were pure waste. The ban eliminated the defection option and actually benefited the firms by removing the arms race.

**Considerations:**
- Regulatory prohibition that benefits the regulated parties (the firms) may face regulatory capture concerns
- Prohibition must be designed to prevent new forms of defection from emerging (if TV advertising is banned, does billboard advertising become the new defection option?)
- Prohibition works best when the defection option has a clear legal definition

---

## Level 5: Ostrom Commons Governance

See [ostrom-commons-governance.md](ostrom-commons-governance.md) for full treatment.

**When to use:** Multiperson dilemma involving a shared resource; group is identifiable and can be organized; resource is local enough for community governance to be credible.

**Summary of when NOT to use Level 5 alone:**
- Completely anonymous large group (no community relationships)
- Resource spans jurisdictions in ways that prevent coherent local governance
- External authority will not recognize community governance rights (Principle 7 gap)
- Group is too heterogeneous for shared norms to develop

In these cases, Level 4 (external enforcement) may need to be the primary mechanism, with Level 5 principles used where possible to reduce enforcement costs.

---

## Mechanism Selection Matrix

| Situation | Recommended Level | Key reason |
|---|---|---|
| Ongoing bilateral relationship, observable, discount rate low | 1 (generous tit-for-tat) | Self-enforcing, no external requirement |
| Bilateral, trust depleted by prior defection, otherwise viable | 2 (escrow/promises) | Restart credibility |
| Bilateral, low direct cooperation value, strong reputational stakes | 3 (reputation/linkage) | Indirect enforcement |
| One-shot or short relationship, observable, specifiable defection | 4 (contract) | No shadow of future |
| Competitor coordination (antitrust-constrained) | 1 or 3 only (tacit) | Explicit agreements illegal |
| Shared resource, identifiable community, local resource | 5 (Ostrom) | Scale and community fit |
| Large anonymous group, no community structure | 4 (regulation) | Cannot self-govern |


Security scan verdicts — ClawScan: suspicious | static analysis: clean | VirusTotal: clean | SkillSpector: suspicious (HIGH)