Answer to Question #173814 in Economics of Enterprise for Sarah

Question

One way of which has been proposed for sustaining high levels of contribution in voluntary contribution games is to allow participants to pay to punish free-riders.  We believe that this is effective when

Participants who are tempted to reduce contributions anticipate future punishment and so conclude that they are better off maintaining contributions.

Giving participants the ability to punish violation of a social norm means that adherence to the social norm becomes the Nash equilibrium of the game.

All of the other three statements are partial explanations, with participants being willing to punish free riding, potential free riders realising that adherence to the social norm is now the payoff maximising strategy, and the Nash equilibrium becoming adherence to the social norm.

Participants are not altruistic and so are willing to punish free riding.

Answer 1

• The Nash equilibrium is a game theory decision-making theorem that states that if a player sticks to their initial strategy, they will obtain the desired result.
• When considering the decisions of other players, each player's strategy is optimal in the Nash equilibrium. Every player wins because they all get the result they want.
• The Nash equilibrium is often applied in conjunction with dominant strategy, which states that a performer's chosen strategy will produce better results than all other potential options, irrespective of the opponent's tactic.
• The Nash equilibrium does not always mean that the most optimal strategy is chosen.