Institutions of public judgment established by social contract and taxation

Abstract

Indirect reciprocity is a compelling explanation for stable cooperation in a large society: Those who cooperate appropriately earn a good standing, so that others are more likely to cooperate with them. However, this mechanism requires a population to agree on who has good standing and who has bad standing. Consensus can be provided by a central institution that monitors and broadcasts reputations. But how might such an institution be maintained, and how can a population ensure that it is effective and incorruptible? Here, we explore a simple mechanism to sustain an institution for judging reputations: a tax collected from each member of the population. We analyze the possible tax rate that individuals will rationally pay to sustain an institution of judgment, which provides a public good in the form of information, and we derive necessary conditions for individuals to resist the temptation to evade their tax payment. We also consider the possibility that institution members may be corrupt and subject to bribery, and we analyze how strong the incentives against corruption need to be. Our analysis has implications for establishing robust public institutions that provide social information to support cooperation in large populations—and the potential negative consequences associated with wealth or income inequality.